Achieving Affordability

6.4.1 Economics of Broadband Adoption

6.4.2 Broadband service pricing as a barrier to adoption

• 6.4.2.1 Cross-country comparisons of fixed and mobile broadband

  Broadband pricing does not lend to easy comparisons within and across countries. Operators tend to include different components in the price structure, ranging from speed (download and upload), limits on content download (known as CAPs), hardware costs (such as the modem and router), and activation costs (including installation charges). In addition, monthly prices can include voice subscription charges if broadband is offered within a service bundle. As a result, comparative analysis needs to normalize all of these components, in addition to control for purchasing parity differences across world regions. This section provides examples of pricing differences and presents an approach for developing price comparisons useful for serving as an input for developing policy initiatives.

  Cross-country comparisons of broadband prices require implementing a consistent approach for collecting pricing information and a methodology for normalizing/standardizing data. In the first, domain, the OECD has generated a methodology* for gathering broadband prices that comprises the following recommendations:

  • If possible, data should be collected for three country operators (the incumbent telecommunications operator, the largest cable provider (if there is cable coverage) and one alternative provider, if available) offering service over DSL, cable or fiber. Offers should be advertised in the respective operator websites, be available in the country’s largest city (or region if it is a regional carrier), and be communicated as monthly subscriptions.* It is usually the case that advertised speed is not similar to service throughput. Given the difficulty in collecting reliable service quality data, it is preferable to develop comparisons based on advertised speeds (although it would penalize the higher quality providers).

  • In collecting pricing data, the following elements should be addressed:

    • Is broadband pricing a stand-alone offer or is it sold as part of a service bundle including voice communication, and/or television service?

    • Do offers include discounts for long-term commitments?* The OECD methodology recommends that, for standardization purposes, only commitments of 24 months or less should be included

    • Treating voice components of a bundle: Some plans offer a number of included phone calls as part of the broadband plan, discounts for carrier pre-selection, or require a certain amount of phone use per month. The OECD methodology typically tries to exclude, if possible, all ancillary pricing elements from the broadband price.

    • Finally, while the OECD methodology converts pricing data to purchasing power parity (PPP), it is worth mentioning that if comparisons are made within a certain region, depicting similar income per capita levels (e.g. Latin America), this conversion is not needed.

  • In collecting data for comparing CAPs (the limit on information to be downloaded from the Internet), the following recommendations should be followed:

    • Present caps in megabytes per month.

    • Caps should be compiled for all domestic and international traffic. However, in cases where national and international traffic are capped differently, the caps for international traffic should be considered for comparison.

    • Costs for additional traffic should be accounted for in price per additional megabyte.

    • When operators offer additional monthly traffic in different bundles the price should reflect the lowest price per MB across offers.

    • When prices per additional megabyte are on a graduated scale, the average of all prices should be used.

    • Prices and bit cap measures should not take into account bandwidth offered during specific times of day.

  Once data is collected, its normalization for comparison purposes needs to follow a set of standard procedures:

  • Use average pricing for the first 24 months of service purchase.

  • Use a common set of offers:

    • For fixed broadband, start with a basic plan with a 2 GB cap.

    • However, in some countries the basic plan (which is offered at a low download speed) could have been withdrawn from the market; in that case, it could be preferable to measure a service that is likely to stay in the market for an extended period of time: 2.5 Mbps download speed and 6GB cap. This choice normalizes product selection eliminating the low performance products, that could be offered in certain countries as plan.

    • The OECD recommends* the usage of broadband price baskets for comparison purposes. For example in fixed broadband, basket 3 is defined as services with at least 6 Mbps of download speed and a 6 GB cap. In the case of mobile broadband, the OECD differentiates between laptop, tablet, and handset use, proposing five baskets per device (see table 6.13).

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  TABLE 6.13

  Mobile Broadband basket proposal - tablet, laptop and handset use

  Source: OECD Broadband Portal

• 6.4.2.2 Broadband price elasticity

  As reviewed in section 6.2.2.4, broadband price elasticity is a function of service adoption. At lower levels of service adoption, broadband is price inelastic. This means that early adopters are not sensitive to price declines. Beyond a threshold point near 3% adoption, price elasticity increases significantly and persists at high levels up to 20% penetration, when it starts declining again.

  Evidence of this behavior has been identified in a number of studies of fixed broadband pricing. On the other hand, research on mobile broadband pricing is not conclusive as of yet in terms of estimating service price elasticity. This is due to the technology’s recent deployment, compounded by the complexity of estimating cross- elasticity between fixed and mobile broadband (two services that will be increasingly becoming substitutes).

  The following section reviews evidence of price elasticity in each service and presents a model that could serve as a tool for estimating service adoption as a result of potential price reductions.

  Fixed Broadband price elasticity

  There are several studies that shed a light on the potential price elasticity of broadband services. For example, by relying on data from a survey of approximately 100,000 US households, Goolsbee (2006) found fixed broadband service demand between 1998 and 1999 to be fairly elastic. According to the author, for levels of penetration between 2% and 3%, price elasticity was between -2.8 and -3.5.

  In another study, Galperin and Ruzzier (2012) utilized data for the OECD and Latin America to estimate the elasticity of fixed broadband service in 2011. Their main finding is that the elasticity of both regions varies. In the case of Latin America, where penetration averaged 7.66% in 2011, broadband price elasticity was -1.88. In the case of the OECD, with an average broadband penetration of 27.48%, price elasticity was -0.53. This result begins to point out that, as expected, mature markets tend to be more price inelastic. Coincidentally, Lee, Marcu and Lee (2011) found that for OECD countries between 2003 and 2008, elasticity was -1.58 (lower than for Latin America). Confirming the inverse relation between penetration and elasticity, Dutz, Orszag and Willig (2009) analyzed the elasticity of broadband service in the US between 2005 and 2008. They found that in 2005 the elasticity was of -1.53 but declined to -0.69 in 2008, confirming the declining elasticity trend at higher penetration levels.

  Table 6.14 presents the summary results of all studies briefly reviewed above.

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  TABLE 6.14

  Studies on Broadband Service Price Elasticity

  Source: Compiled by the author

  Considering the level of service adoption at the time each of these studies was completed allows estimating the relationship between fixed broadband penetration and elasticity (see figure 6.26). 

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  FIGURE 6.26

  Correlation between Fixed Broadband (FBB) Penetration and Price Elasticity

  Source: Estimates by the author based on research literature

  Note: the t-value for the variable of interest is -.755

  While the elasticity data in figure 6.26 is presented in absolute values, the price elasticity coefficient is always negative indicating the indirect relationship between price and demand. Thus, the relationship between both variables indicates that a change in the price level would have a positive impact in the level of penetration of fixed broadband. By relying on the estimates depicted in figure 6.26, the effect of a price reduction between 5% and 25% was estimated for different regions of the world (see table 6.15).

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  TABLE 6.15

  Impact on Weighted Average Penetration Level (HH) of Fixed Broadband of a Price Reduction

  Source: Estimates by the author based on ITU 2011 data

  HH refers to Households

  As indicated in table 6.15, the price elasticity is higher for the regions with lower levels of penetration. As a result, in regions like Sub Saharan Africa or South Asia, a 25% price decline could yield an approximate doubling of current penetration levels. The increase in fixed broadband penetration is substantial in other emerging countries as well (see table 6.16). 

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  TABLE 6.16

  Growth of Penetration Level (HH) of Fixed Broadband as a consequence of a price reduction

  Source: Estimates by the author based on ITU 2011 data

   

  Note: For each tariff reduction scenario, the growth on broadband penetration was estimated based on the formula of figure 6.26.

  Data on broadband price elasticity models was utilized to develop a simple model template for estimating the impact of a reduction in subscription prices on service penetration. Follow these steps:

  1. Locate the country in one of the following seven regions (East Asia & Pacific, Europe & Central Asia, Latin America & Caribbean, MENA, North America, South Asia, Sub Saharan Africa).

  2. Input total number of households, fixed broadband subscriptions, and average monthly subscription charge.

  The model will provide the yield in broadband household penetration by price reduction scenarios (5%, 10%, 15%, 20%, 25%). The formula underlying the model and derived from the data in figure 6.25 is the following:

  • ???????? ??????????? = 3.9393e^{-0.026*Current Penetration Level*Price Reduction} 

  Expected Penetration: penetration resulting from a price reduction 3.9393: -0.026: Price elasticity coefficient resulting from a decline in pricing of 1% Current Penetration: penetration of broadband at time of test of price reduction Price reduction: hypothetical price reduction

  BOX 6.4.1

  Estimating the Impact of Broadband Price Declines

  Mobile broadband price elasticity 

  In the section above, the evidence provided showed that fixed broadband service pricing was indirectly linked to penetration levels. Unfortunately, given the recent deployment of mobile broadband there is still no substantial evidence linking pricing and penetration.* However, existing pricing data for OECD and Latin American countries allows estimating the elasticity for a 3G connection. For this purpose, six models were specified for mobile broadband plans dongles/ air cards and smartphones:

  • Smartphone plans with 500 MB monthly cap
  • Smartphone plans with 1 GB monthly cap
  • Smartphone plans with 2 GB monthly cap
  • Air card/dongle plans with 1 GB monthly cap
  • Smartphone plans with 2 GB monthly cap
  • Smartphone plans with 5 GB monthly cap

  Data used for estimating elasticity coefficients comprised the following:

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  TABLE 6.17

  Variables for the economic estimation of the mobile broadband price elasticity model

  The regressions, included in the appendix, indicate that the price elasticity for air cards and dongles is twice that one for handsets (see table 6.18).

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  TABLE 6.18

  Price elasticity coefficients for Different Price Plans

  Source: Estimates based on models specified by the author

   

  *** Significant at 5%

  **   Significant at 10%

  *     Signficant at 15%

  According to these models, a 10% price decline in the mobile broadband plan for a smartphone connection would generate a penetration increment between 2.35% and 3.20%. On the other hand, a 10% price decline in air cards / dongles plans for personal computer connectivity could yield an approximate increment of penetration level between 6.33% and 6.73%. In the second situation the increment would not only come from new broadband subscribers; it would comprise a substitution effect from fixed broadband to mobile broadband. Finally, elasticity coefficients for handsets with higher CAPs tend to be lower than the basic plans because high volume subscribers are less price sensitive, while lower CAP subscribers are primarily email and Facebook users, implicitly low value subscribers. 

• 6.4.2.3 The effect of competition on broadband pricing

  Having reviewed the importance of service pricing in limiting adoption of broadband, it is relevant to address potential policy initiatives that could yield a reduction in tariffs. As it has been considerably researched, the development of competition is one of the major tools for affecting a reduction in telecommunications service pricing. The theoretical basis of competition is the notion that, in the telecommunications market, multiple operators can compete among each other and generate sufficient benefits for consumers in terms of price-reductions, while guaranteeing an appropriate rate of innovation. The following features characterize a telecommunications competition model:

  • Existence of multiple operators serving the same market based on their own network.
  • Existence of multidimensional competitive dynamics (prices, services and user service quality) among industry players.
  • Reduction of retail prices for consumers, and intense competition in product differentiation (dynamic efficiencies), resulting in additional consumer surplus.
  • Competitive stimulation for each operator to increase the level of investment in its own network.
  • Absence of tacit collusion between operators due to the high rate of innovation and competition based on product differentiation.

  A number of countries around the world have already implemented this list of principles resulting in competition for broadband as a model for organizing the industry (see table 6.19).

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  TABLE 6.19

  TABLE 6.19 National Market Shares (2011)

  Source: National regulatory agencies; company reports

   

  Note: numbers in brackets depict market share

  The industry structure in these countries not only includes a facilities-based telecommunications operator and one (or more) cable operator, but also a second mobile/landline telecommunications operator and at least one mobile operator competing with the landline operators on an intermodal scale.

  A competitive market structure has a positive influence on the reduction of broadband prices. For example, this author determined that in Latin America, the average monthly price of a basic fixed broadband price declined from US$21.06 in 2010 to US$17.46 in 2012 (a reduction of 17% in two years). Table 6.20 presents price reductions in the region across fixed and mobile broadband plans.

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  TABLE 6.20

  Latin America: Broadband Average Monthly Subscription Prices (2010-12) (in USD)

  Note: Includes Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Mexico, Nicaragua, Panama, Paraguay, Peru, Dominican Republic, Uruguay, and Venezuela.

  As table 6.20 indicates, broadband prices in Latin America have been declining, albeit at different rates. To understand the importance of competition in driving the price reductions, Katz (2012) completed an analysis of the relationship between competitive intensity (as measured by the Herfindahl Hirschman Index) in the Latin American broadband industry and retail prices (see figure 6.27).

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  FIGURE 6.27

  Latin America: Fixed Broadband Competition and Price per Mbps

  Source: Katz (2012)

  The correlation coefficient between broadband competitive intensity and broadband prices is 0.63%. The figure 6.27 also indicates that, even at moderate competitive levels (HHI <4000), prices tend to cluster at the lower levels within the region. A similar analysis was conducted but in this case, the HHI index was calculated by adding the market shares of fixed and mobile providers.* 

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  FIGURE 6.28

  Latin America: Fixed and Mobile Broadband Competition and Price per 6Mbps of Fixed Broadband

  Source: Katz (2012)

  Figure 6.28 depicts a directional correlation between the index of competitive intensity in the broadband market and prices of fixed broadband offerings at the 6 Mbps download speed level. This relationship indicates an embryonic convergence between the fixed and mobile broadband markets that is having a positive influence in the price of fixed broadband. In this context, one can point out at the positive influence that mobile broadband launch has had on overall service prices.

  As a side note, it is important to mention that it is common in the developed world and some emerging countries that telecom operators, in the context of competitive pressures, offer first-time customers discounts and free promotional offers covering activation fee, first-year monthly subscriptions, etc. This marketing effort, resulting from competitive incentives prevalent in the market, has also a positive contributing impact on total cost of ownership.

• 6.4.2.4 Policy initiatives aimed at reducing the cost of broadband

  Beyond the competitive stimuli, the reduction of broadband service prices can be achieved through a number of targeted policy initiatives. These initiatives are generally implemented with the objective of achieving universal broadband adoption (see Module 4 – Extending Universal Broadband Access and Use). The underlying rationale for these policies is that, beyond a competition model, government policies should be implemented to further price reductions of broadband in order to make it accessible to segments of the population affected by limited affordability.

  This section will examine four policy options. The first one relies on state-owned telecommunications operators to offer, under their public service imperative, a low- priced broadband service. Obviously, this option is only viable in those countries that have not completely privatized their telecommunications industry. The second option entails a negotiation between the government and private operators for them to offer a low-priced broadband service targeted for disadvantaged segments of the population. The third option is also an agreement between the government and private sector broadband providers to offer low-priced services, but in this case limited to institutions (such as schools, libraries, or health clinics). The fourth option comprises offering free Internet access through WiFi services located in public areas, such as squares, libraries, and transportation hubs.

  Launch by a publicly owned service provider

  Under this option, a state-owned broadband provider assumes responsibility, as a public service entity, for providing a low-price broadband service. The advantage of this option is that, in addition to fulfilling the objective of tackling the economic barrier, the offering can act as an incentive for other private operators to launch their own more affordable service. Services under this option range from a 256 Kbps line offered for free to existing wireline customers (Uruguay) to a prepaid broadband plan (Venezuela).

  In a country where the fixed-line market is not privatized, government-owned Antel has long enjoyed a monopoly on the Uruguayan telecom market. As such, the telco charged some of the highest prices for broadband in the region, despite the fact that Uruguayan wages are less than those rates found in some of its neighboring countries. These high fees were blamed for the country’s lower broadband penetration rate.

  In May 2011, Antel launched its “Servicio Universal Hogares” – or “Internet for All” - plan, aiming to bring Internet access to every home in Uruguay. For a one-time payment of US$30 – the cost of a modem - all fixed line phone customers qualified for free ADSL service. The package offered a basic connection of 256 Kbps and targeted the low-income segment to which the price of broadband represented a barrier to connectivity. At the time, those homes and businesses with basic Internet connections paid approximately US$ 150 monthly. In a similar push to expand connectivity, the Uruguayan government also planned to reach schools and educational institutions with Fiber-to-the-Home (FTTH) technology.

  In June 2011, Antel announced plans to connect more than 80,000 Uruguayan households with FTTH by the end of the year. This project initially targeted higher-income, urban areas but incorporated plans to expand to the lower socioeconomic groups following the initial rollout. The rollout incorporated an investment of more than US$100 million and a partnership with the Chinese technology firm ZTE. Described as “the most ambitious broadband effort in Latin America,” the FTTH project as well as the opening of the Bicentenario submarine cable in early 2012 not only increased broadband access, but also enhanced broadband speed and service quality.

  By the end of 2011, however, the broadband penetration rate in Uruguay hovered at 36% (22% of which was mobile), compared to a mobile phone penetration rate of 141%. In an attempt to address this disparity, Antel focused on the provision of mobile broadband services. The December 2011 launch of its commercial LTE services allowed the telco to offer broadband connections to those regions not yet impacted by the FTTH rollout as well as those customers who could not afford the connectivity costs of fixed Internet.

  Following initial pilots in trials throughout 2011, Antel began the rollout and expansion of LTE services, offering customers two package plans from which to choose. By signing a 2- year contract, customers could pay US$ 90 per month for 30 GB. For US$ 76 per month plus an additional $6 in modem rental fees, customers could access 15GB through a 15-day auto- renew contract.

  BOX 6.4.2

  Antel (Uruguay)

  Sources:

  Budde, Paul. "Uruguay - Telecoms, Mobile, Broadband and Forecasts." Market Research. N.p., 25 Nov. 2012. Web. http://www.marketresearch.com/Paul-Budde-Communication- Pty-Ltd-v1533/Uruguay-Telecoms-Mobile-Broadband-Forecasts-7256999/.

  "Broadband Internet Access Worldwide." Encyclopedia. NationMaster, 2006. Web. http://www.nationmaster.com/encyclopedia/Broadband-Internet-access-worldwide.

  Prescott, Roberta. "Uruguay's Antel Eyes Mobile Broadband Opportunities with LTE." RCR Wireless News Americas. N.p., 20 Apr. 2012. Web. http://www.rcrwireless.com/americas/20120420/carriers/uruguays-antel-eyes-mobile- broadband-opportunities-when-launching-lte/.

  In May 2008, state-controlled incumbent fixed-line operator CANTV launched its prepaid broadband Internet access plan known as Plan ABA. The plan targeted Venezuela’s lower- income population and those citizens who did not already have the technology, offering “social rates” to make broadband more affordable and accessible. The plan not only served to increase subscribers for CANTV, but to improve the provider’s image as “a company belonging to the state of Venezuela” with the goal of reducing the digital divide. The operator began focusing more of its attention on the provision of more affordable basic services following its 2007 renationalization.

  Customers can pay for and manage their broadband usage through CANTV’s prepaid calling card, known as the Un1ca card. Launched in 2001, the card offers access to fixed, wireless, and public telephony and Internet services without the obligation of upfront payments or commitments. The card was credited with providing Venezuela citizens with one-stop access to a wide range of services and products, acting as a “communications passport.”

  Basic services – which included a 256 kpbs connection and a 100 Mb download limit- cost US$ 9.31 monthly, but users could increase capacity for an additional US$ 0.08 per Mb. Users were also supposed to pay the US$ 30 Aba subscription fee, which included a modem, but the operator waived the fee. The plan is aimed at prepaid customers; postpaid broadband customers will also require an Un1ca card and must purchase or rent their own modems in order to use the service.

  BOX 6.4.3

  Plan ABA de CANTV (Venezuela)

  Source:

  "Cantv Launches Prepaid Broadband." Telecom. Business News Americas, 6 May 2008. Web. http://www.bnamericas.com/news/telecommunications/Cantv_launches_prepaid_broadband .

  Annual Report 2001. Rep. CANTV, 2001. Web. http://www.cantv.com.ve/Portales/Cantv/data/InfAnual2001CantvENGLISH.pdf.

  Agreement reached by private operators 

  In this case, government policy makers negotiate with private broadband providers the offering of a low-priced plan. This can be achieved in the context of the formulation of a national broadband plan. Such has been the case of the Brazilian National Broadband Plan, which triggered a negotiation leading to the launch of the “Banda Larga Popular”, offered by several operators.

  Another option to reach such an agreement could be to attach the offering of a low- priced plan as a sine qua non condition for providing regulatory approval of an incumbent plan. Such was the case in the United States, where the government determined that Comcast should offer a low-priced broadband service if it were to receive approval for acquiring NBC Universal. This triggered a process that led all other major cable TV operators to join in the initiative.

  A slight variance of this option entails a move by an incumbent wireline operator to offer a low priced plan and create good will in order to pre-empt a threatening government regulatory move.

  In September 2011, cable giant Comcast launched its “Internet Essentials” plan to offer broadband to as many as 2.5 million low-income families for a monthly rate of US$ 9.99. The plan came as part of the approval process in its acquisition of the media and entertainment company, NBC Universal. Beyond the 1.5 Mbps Internet connection, eligible customers will also qualify for $150 refurbished computers, which will come with software donated by Microsoft. Comcast will also offer digital literacy training to these users free of charge.

  To qualify for the plan, households must a) not yet have a broadband connection and b) have a child enrolled in a school lunch program. The US$ 9.99 monthly rate lasts for two years, at which point customers will likely have the option to renew at a higher – but still discounted – price. Because the US$ 9.99 covers the companies’ overhead costs, providers will likely not experience a significant loss in earnings nor will the government need to provide supplemental funding.

  In late 2011, the United States Federal Communications Commission (FCC) announced that most of the country’s major cable companies partnered to join the initiative. These companies included Time Warner, Cox, and Charter, though AT&T and Verizon chose not to participate. The low prices will likely attract new subscribers who previously could not afford the cost of an Internet connection. Morgan Stanley is working with the cablecos to develop a microcredit program while partnering employment and education companies will offer specialized content to make Internet access more attractive to these users.

  The FCC said that it supported the partnership as a means to increase the country’s broadband penetration, particularly amongst this otherwise underserved segment of the population, and praised its potential to guarantee digital literacy amongst the country’s students. It hopes that by increasing Internet access and digital literacy, high school graduates will be more hirable, as even entry-level jobs typically require basic ICT skills, which also help employees in the online job search.

  BOX 6.4.4

  Internet Essentials (United States)

  Sources:

  Anderson, Nate. "Comcast’s $9.99 Internet For Low-Income Families Goes Nationwide." Wired. Conde Nast Digital, 21 Sept. 2011. Web. http://www.wired.com/business/2011/09/comcasts-9-99-internet-for-low-income-families- goes-nationwide/.

  "Cable Companies To Offer Broadband To Low-Income Households For $9.99/Month." Deadline Hollywood. N.p., 8 Nov. 2011. Web. http://www.deadline.com/2011/11/cable- companies-to-offer-broadband-to-low-income-households-for-9-99month/.

  In 2009, only one-third of households within the Brazilian state of São Paulo had access to a broadband connection. Of the remaining two-thirds, nearly 60% blamed that the high cost of Internet services. That year, the governments of São Paulo, Pará, and Distrito Federal partnered together to offer low-income citizens in these districts affordable broadband. The social inclusion program, dubbed Banda Larga Popular, provided Internet connections for US$ 17 per month (35 reals, or 29 reals in those states where ICMS taxes do not apply). The Ministry of Communications oversees all monitoring and compliance while the operators are in charge of the provision of broadband and the promotion of such services. Inked in 2011, the initiative falls under the umbrella of Brazil’s National Broadband Plan (PNBL) and will run through 2014.

  Telefónica Brasil delivered the service, which reached speeds up to 256kbps using wi-mesh technology. To ensure that the telco could cover its costs while charging such a low price, the government waived the 25% ICMS tax. While the government invited other telcos to participate, only Telefónica chose to do so.

  Within São Paulo, the project target low-income households that already owned a computer but did not have an Internet connection. Initial analysis estimated that this criterion would include approximately 2.5 million households.

  In December 2010, Cisco announced the results of its Broadband Barometer study, showing that Brazil had reached 16.2 million broadband connections earlier in the year. This number reflected an increase of 7.9% over the previous half year and 18.1% over 2009. The study credited the growth in home computers with the rise in broadband subscribers, which it said came as a result of lower tax rates on ICT equipment and by the increase in low-cost broadband plans available to new users. Cisco directly cited the success of the Banda Larga Popular initiative.Banda Larga Popular (Brazil)

  BOX 6.4.5

  Banda Larga Popular (Brazil)

  Sources:

  Cisco. Brazil Achieves More Than 16 Million Broadband Connections. The Network. N.p., 9 Dec. 2010. Web. http://newsroom.cisco.com/dlls/2010/prod_120910.html.

  "Telefonica Brasil SA (VIV)." Reuters. Thomson Reuters, n.d. Web. http://www.reuters.com/finance/stocks/companyProfile?symbol=VIV.

  "São Paulo Government Introduces Low-costing Broadband." Business News Americas. N.p., 15 Oct. 2009. Web. http://www.bnamericas.com/news/telecommunications/Sao_Paulo_government_introduces_ low-costing_broadband.

  Negotiation of low priced service for public administration facilities (health care centers, schools, libraries)

  In this case, the offering is negotiated but only for providing broadband access at a reduced price to public entities charged with providing social services. 

  The government of Brazil launched its initiative Projeto Banda Larga nas Escolas Públicas Urbanas (PBLE) in 2008, committing to the provision of free broadband connections to a minimum of 90% of urban schools. The communications ministry established the project as a partnership with the ministry of education and the telecom regulator, Anatel. The Brazilian telcos signed concession agreements with the government agreeing to support the program as a term of rolling out their broadband backhaul infrastructure. As part of the agreement, the operators are required to provide the broadband, an agreement that critics argue forces customers to bear the costs.

  Per the country’s communications ministry, by year-end 2010, 91.6% of urban public schools (or 57,586 institutions) received free Internet connections. The project targeted the remaining 5,278 urban schools in 2011 and by October 2012, a total of 63,394 public primary and secondary schools offered broadband access to students. Of these schools, 37,773 are municipal, 25,363 are state-owned, and 258 are federal. In 2012, the project connected an average of 17 schools per day. It will likely continue through 2025 to impact a total of 70,000 schools and update connection speeds, which at present are between 2 Mbps and 10 Mbps.

  BOX 6.4.6

  Projecto Banda Larga nas Escolas Publicas Urbanas (Brazil)

  Sources:

  "All Urban Public Schools to Have Broadband by Year-end." Telecom. Business News Americas, 2 Feb. 2011. Web. http://www.bnamericas.com/news/telecommunications/all- urban-public-schools-to-have-broadband-by-year-end.

  "More than 63,000 Public Schools in Brazil Have Broadband." Internet. Telecompaper, 11 Oct. 2012. Web. http://www.telecompaper.com/news/more-than-63000-public-schools-in- brazil-have-broadband--901220.

  National Broadband Plans. Rep. Organization for Economic Co-operation and Development, 11 June 2011. Web. http://www.oecd.org/internet/interneteconomy/48459395.pdf.

  "Popular Broadband Has Already Reached More than 1,800 Brazilian Cities." Porta Brasil. N.p., 6 Sept. 2012. Web. http://www.brasil.gov.br/news/history/2012/09/06/popular- broadband-has-already-reached-more-than-1-800-brazilian- cities/newsitem_view?set_language=en

  Free Wi-Fi access points

  The provision of free WiFi Internet access is being conceived as one of the building blocks needed to build a city’s international competitiveness. There are several features and options of a free WiFi program:

  • Coverage of public spaces: squares and parks, public transportation, including metros, public libraries.
  • Type of service: amount of time provided for free access (1hr. limit while commuting, open unlimited access).
  • Type of service provider: under contract with telcos or other broadband player, offered by the city administration.
  • Quality of service: basic 128 kbps, video streaming quality.
  • Business model: free provision based on a singular event, then moving to a pre-paid offering, potentially including customized interactive digital advertising.

  The government agency overseeing all forms of public transportation in the city, Transport for London has increasingly demonstrated a commitment to providing IT services throughout the system. The Summer 2012 Olympic Games only heightened this focus. Beyond using advanced technology to improve its own operations, the agency stressed the importance of data access to allow commuters to “make better travel choices.” Implemented innovations included open standards, sensor networks, and “ubiquitous connectivity.”

  In March 2012 – just months before the kickoff of the Summer Olympic Games in the city – Transport for London announced that it awarded a contract to Virgin Media for the provision of free WiFi within the London Underground. A similar contract was awarded two weeks later to the Internet Services Provider Cloud for the London Overground. The project provided commuters with one hour of free WiFi access per day to the more than 200,000 daily commuters. The providers promised speeds fast enough to stream video without delay, but access was only available at the stations and not on the actual trains in the case of the Underground due to technical reasons.

  Virgin’s contract alone covered 120 London stations, 80 of which were wired in time for the Olympics. The remaining 40 stations had WiFi access by the end of 2012. While the contract stated that Virgin must supply the WiFi free of charge during the Olympic games, the provider continued to offer the service for free through year-end 2012. Beginning in 2013, Virgin Media customers will continue to access the network at no additional cost; all other users will pre-pay by the minute. Access to online commuting information will remain free.

  Neither the government nor the operators disclosed the financial arrangements beyond stating that the contract covered the cost of deployment.

  The project spurred interest from global advertising firms, which explored the potential to display interactive ads and landing pages. At some locations, Nokia fully funded the project as a way to market the launch of its Windows smartphone. This investment allowed the Finnish ICT company to monitor users’ browsing trends throughout London and also helped providers to gauge the best locations for future free WiFi hot spots. The trend in advertiser investment will likely continue.

  In late July 2012 Telefónica Europe’s subsidiary, O2, completed the deployment of hotspots throughout the city to complement the London Underground and London Overground WiFi networks. While the provider required users to register, they could continue to access the network free of charge even once the Olympics ended. In order to justify this investment, O2 targeted local businesses for advertising revenue, with department store House of Fraser immediately participating in the plan. The provider envisions customized advertising, allowing restaurants and retailers to reach potential customers with discounts and information based on their geographic location.

  BOX 6.4.7

  Free Underground Overground Internet (London)

  Sources:

  Ungerleider, Neal. "London Underground, Overground Get Free WiFi." Fast Company. N.p., 27 Mar. 2012. Web. http://www.fastcompany.com/1826398/london-underground- overground-get-free-WiFi. 

  Rasmussen, Paul. "Nokia Funds Free WiFi in London for Windows Phone Marketing Campaign." FierceWirelessEurope. N.p., 2 Nov. 2011. Web. http://www.fiercewireless.com/europe/story/nokia-funds-free-WiFi-london-windows- phone-marketing-campaign/2011-11-02.

  "Transport for London." CIO 100. CIO UK Magazine, 2012. Web. http://www.cio.co.uk/cio100/transport-for-london/114294/.

  Ray, Bill. "Virgin Media Snags London Underground WiFi Monopoly." The Register. N.p., 15 Mar. 2012. Web. http://www.theregister.co.uk/2012/03/15/virgin_wi_fi/.

  In 2006, Parisian mayor Bertrand Delanoe announced that free public access WiFi “is a decisive tool for international competition.” One year later, the city launched its WiFi network with access points in public parks, squares, and libraries. As part of a contract with the mayor’s office, Alcatel-Lucent and wireless operator SFR partnered to build and manage the network, which included more than 400 free public hotspots. Paris and the Ile-de-France regions funded the project, which totaled approximately 2 million EUR plus an additional 500,000 EUR annually for maintenance. SFR won the contract through a public tender, but France Telecom sued the city, citing “unfair competition,” despite its participation in the tender.

  This initiative was not the first of its kind in Europe. With more than 2 million residents of Paris proper and more than 11 million residents in the Parisian suburbs, however, it perhaps had the largest reach. In 2005, the Greek town of Trikala launched its 80 million EUR E- Trikala initiative, which included the installation of the town’s first 10 free public WiFi points. In its first year alone, it attracted 3,500 users. In 2007, the second phase of the project went live, with Swedish telecom manufacturer Ericsson contracted to deploy the more expansive infrastructure and improve service. E-Trikala also partnered with Cisco to build a 15-kilometer metro optical network linking city buildings and connecting additional hotspots. By mid-2007, the number of registered users had doubled since year-end 2005, reaching more than 6,000 users.

  Following this project, seven additional Greek municipalities announced plans for similar initiatives. These cities and towns signed an agreement to connect with each other to create “the first digital community in Greece.” Sweden saw a similar model, whereby more than 150 individual towns built their own networks and connected through a shared IP backbone.

  BOX 6.4.8

  Public WiFi (France and Greece)

  Sources:

  Vos, Esme. "Free Wi-Fi Service in Public Areas in Paris." MuniWireless. N.p., 29 Sept. 2007. Web. http://www.muniwireless.com/2007/09/29/free-wi-fi-service-in-public-areas-in- paris/.

  Le Maistre, Ray. "Public WiFi Comes to Paris." Light Reading. UBM Tech, 2 Mar. 2007. Web. http://www.lightreading.com/document.asp?doc_id=118583.

  In 2008, Hong Kong finalized its revision of the 1998 Digital 21 Strategy, stating the

  following objectives:

  • Facilitating a digital economy; 

  • Promoting advanced technology and innovation;

  • Developing Hong Kong as a hub for technological cooperation and trade;

  • Enabling the next generation of public services; and

  • Building an inclusive, knowledge-based society.

  The strategy recognized the importance of investing in information infrastructure to promote economic growth. Already boasting some of the world’s highest broadband penetration rates, Hong Kong looked for additional ways to encourage Internet access. Incorporated into the Digital 21 Strategy, the Government WiFi Program – known as GovWiFi – installed Wi-Fi hotspots in government locations to offer free broadband access.

  Later that year, the program began the installation process throughout all 18 districts. Locations included public libraries, public enquiry service centers, sports venues, cultural and recreational centers, cooked food markets and cooked food centers, job centers, community halls, major parks, government buildings and offices.

  Per its website, through GovWiFi: 

  • People can surf the web freely for business, study, leisure or accessing government services whenever they visit the designated Government premises.

  • Business organizations can extend their services to a wireless platform to reach

    and connect with their clients.

  • ICT industry players can make use of this new wireless platform to develop and

    provide more Wi-Fi applications, products and supporting services to their

    clients, and open up more new business opportunities.

  • Foreign visitors can enjoy Internet access at the designated tourist spots

  By mid-2012, the program offered services at more than 400 locations. Its website allows users to search for locations and also offers security tips and addresses the WiFi-related health concerns that have been raised. To encourage use of the WiFi spots, the program periodically holds events, contests, and promotion campaigns.

  BOX 6.4.9

  GovWiFi (Hong Kong)

  Source:

  "Programme Overview." GovWiFi. GovHK, May 2012. Web. http://www.gov.hk/en/theme/wifi/program/index.htm

  "2008 Digital 21 Strategy." N.p., 22 Apr. 2008. Web. http://www.digital21.gov.hk/eng/strategy/2008/Foreword.htm

  In December 2012, Google announced its partnership with Enox, the Brazilian advertising firm, to launch its “Free WiFi” project, allowing users to access the Internet from their personal smartphones, tablets, or computers in bars throughout seven cities in the southern region of the country.

  Google Brazil stated that, "The number of people with smartphones in Brazil is greater than in Germany, France and Australia, and most of them use their devices every day to read news, watch video clips and connect with their friends. By means of this project, we're sure that the Brazilians will be able to enjoy better their friends when they are at the pub, besides creating and registering memories of their moments.” 

  The connection utilized a WiFi or fiber optic connection depending on the bar, offering connections between 10 Mbps and 30 Mbps. Users did not face time limitations or browsing restrictions.

  Beyond offering citizens free Internet services, the project also promoted the Google brand. When users activated the WiFi, their devices automatically launched the Google home page, which displayed the company’s products and download suggestions.

  Free WiFi ran for 90 days during the Brazilian summer.

  The multinational Internet company had experimented with a similar project in India in January 2012, when it partnered with O-Zone Networks to offer free WiFi in an attempt to increase the user base of its social network, Google+, and the video site YouTube, which it acquired in late 2006. While Internet use in Brazil was unlimited and unrestricted, users in India had to pay to access any sites beyond Google+ (unlimited) or YouTube (10 minutes per week for free). The partnership between Google and O-Zone also lasted 3 months.

  While critics of the program saw the initiative as a marketing ploy to promote Google’s own projects in India, proponents saw its potential for increasing Internet access in a country with less than 10% Internet penetration. Prior to the launch of this project, Google cited that 40% of Internet searches and 67% of e-commerce came from mobile Internet use and that free WiFi access would only further encourage this trend of accessing the Internet from portable devices.

  This project bears similarity to Google’s collaboration with Boingo Wireless in the United States, when it sponsored free and discounted WiFi throughout New York City hot zones and subway stations. Following its initial success, the offering expanded to reach Internet users in other metropolitan areas, including Chicago, Houston, Los Angeles, New York, Seattle, and the District of Columbia.

  BOX 6.4.10

  Google's "Free WiFi" Project (Brazil, India)

  Source:

  "Google Offers Free Wi-Fi in 150 Bars in Brazil." Telecompaper. N.p., 14 Dec. 2012. Web. 06 Mar. 2013. http://www.telecompaper.com/news/google-offers-free-wi-fi-in-150-bars-in-brazil--914243

  Parker, Tammy. "Google Sponsoring Free Summer Wi-Fi in Brazilian Bars." FierceBroadbandWireless. N.p., 14 Dec. 2012. Web. 06 Mar. 2013. http://www.fiercebroadbandwireless.com/story/google-sponsoring-free-summer-wi-fi-brazilian-bars/2012-12-14

  Chan, Alice. "Google Offers Free Wi-Fi In India To Access Social Networks." PSFK. N.p., 11 Jan. 2012. Web. 06 Mar. 2013. http://www.psfk.com/2012/01/google-free-wi-fi-india.html

  In January 2013, Thailand’s regulator, the National Broadcasting and Telecommunications Commission (NBTC), announced that it had awarded a grant of US$ 32 million from its Universal Service Obligation (USO) budget to the ICT Ministry to further its free public WiFi project. The project aims to create 40,000 public WiFi spots by the year’s end, with 250,000 spots slated for 2018. The initial locations will include public universities and hospitals, city halls, and major tourist destinations. The installation of 150,000 access points will include five access points per location with speeds of 2Mbps per second. Each access point can accommodate 15 users at 20 minutes per access. 

  CAT Telecom (the state-owned telecom infrastructure company) and TOT Corporation (the state-owned telco) will provide the service. The project represents collaboration between the ICT Ministry and service providers, focusing on the country’s large cities and the “last-mile areas” that currently lack fiber optic networks.

  Per the ministry, the expansion of the Free WiFi project will accelerate the Smart Thailand project, which falls under the national ICT framework. Known as “ICT2020,” it serves as a development strategy highlighting the government’s commitment to ICT infrastructure and services. To ensure its success, ICT2020 emphasizes universal Internet access and device affordability as well as government organization collaboration and support. Under Smart Thailand, the government has committed to offering broadband coverage to 80% of the population by 2016 and 95% of the population by 2020. In early 2012, only one-third of the population had access. Ultimately, the initiative aims to increase Thailand’s global competitiveness by improving education and business sectors and encouraging investment.

  The first phase of Smart Thailand, which runs until 2015, will upgrade the existing telecom networks to cover the aforementioned 80% of the population. The second phase, which runs from 2015 to 2020, incorporates broadband network installation in regions not yet covered by a fiber optic network. The National Broadband Network Company (NBN Co) will operate the nationwide network as part of a joint venture between existing private and public sector operators. The venture will reduce investment duplication and separate the installation and service provision functions. Combined, the two phases will likely total US$ 2.7 billion.

  BOX 6.4.11

  Free Public WiFi (Thailand)

  Source:

  Kunakornpaiboonsiri, Thanya. "Thailand to Create 300,000 More Free Wi-Fi Spots." FutureGov Asia. N.p., 25 Jan. 2013. Web. 06 Mar. 2013. http://www.futuregov.asia/articles/2013/jan/25/thailand-create-300000-more-free-wi-fi-spots/

  Sambandaraksa, Don. "Thailand Issues Funds for Free Public WiFi." Telecom Asia. N.p., 17 Jan. 2013. Web. 06 Mar. 2013. http://www.telecomasia.net/content/thailand-issues-funds-free-public-wifi

  Pornwasin, Asina. "Smart Thailand Project on Track." The Nation. N.p., 28 Feb. 2012. Web. 06 Mar. 2013. http://www.nationmultimedia.com/technology/SMART-THAILAND-PROJECT-ON-TRACK-30176841.html

  By 2008, nearly all of Estonia – a country that spans 45,000 square-kilometers and has a per capita GDP of just $14,300 - had WiFi access following a nationwide push to install access points throughout the country. Colloquially known as “E-stonia,” by this point 1.4 million residents – 50% of whom resided in rural areas – were connected to wireless Internet and 70% of the population conducted personal banking transactions online.

  Beginning in 2002, volunteers with the WiFe.ee organization lobbied for local cafes, hotels, hospitals, parks, and so on to offer Internet access, working with them to design and implement the necessary networks. WiFi.ee stressed the importance of working with locals in the deployment process, as they feared outsiders would not understand the needs of the people nor the geographic or political issues that could potentially cause roadblocks. In fact, once established, nearly all wireless connections were managed by local business owners who recognized that not having WiFi was akin to encouraging customers to go elsewhere. 

  With few exceptions, access came at no cost to the user. Further, with the exception of public schools and libraries, the entire network deployment was made possible without government assistance. Local businesses took responsibility for the creation of the more than 1100 hotspots throughout Estonia. Additionally, by 2005, nearly all schools had Internet access. From their home computers and mobile phones, students could access their schools’ servers and connect to national libraries.

  In 2010, Veljo Haamer, the creator of WiFi.ee estimated that his organization had set up the WiFi found in 75% of the bars and cafes in Estonia’s capital, Tallinn. WiFi.ee charges local business owners between US$ 300 and $500 for the connection setup and maintenance. As more businesses adopted the model of offering free Internet services to customers, other businesses had to follow suit to remain competitive. As the service became more ubiquitous, even train and bus lines began offering WiFi connections.

  BOX 6.4.12

  Public WiFi (Estonia)

  Source: Borland, John. "Estonia Sets Shining Wi-Fi Example - CNET News." CNET News. CBS Interactive, 5 Nov. 2008. Web. http://news.cnet.com/Estonia-sets-shining-Wi-Fi-example/2010-7351_3-5924673.html

  Basu, Indrajit. "Estonia Becomes E-stonia." Government Technology. N.p., 9 Apr. 2008. Web. http://www.govtech.com/e-government/Estonia-Becomes-E-stonia.html?topic=117673

  Boyd, Clark. "Estonia's 'Johnny Appleseed' of Free Wi-Fi." DiscoveryNews. Discovery Communications, 11 July 2010. Web. http://news.discovery.com/tech/estonias-johnny-appleseed-of-free-wi-fi.html

  Created in Madrid in 2005, where it is headquartered, Fon Wireless is now incorporated and registered in the United Kingdom with offices in both Spain and the United Kingdom as well as in the United States, Brazil, France, Germany, and Japan. Its investors include such names as Google and Skype. Described as “crowdsourced WiFi,” Fon allows its members to access free roaming through Fon WiFi Spots by sharing their own home WiFi. In essence, these access points combine to create a “network where everyone who contributes connects for free.” At present, Fon has more than 5 million “Fon Spots” around the world.

  Accessing Fon WiFi requires either a Fon WiFi router with a broadband connection or membership with one of Fon’s telco partners, which have Fon integrated into their CPE devices and offer customers DSL/Cable modems with the pre-installed Fon feature. Non- members can also access a Fon Spot by purchasing an access pass once connected to the WiFi signal. The passes are only available on the login page of each individual hotspot.

  Each Fon Spot consists of two separate, dedicated WiFi signals, one for the home user and the other for other members and visitors of the network. The home traffic is prioritized so as not to slow down home Internet use. Further, to guarantee security, a firewall separates the home signal from the guest signal. Fon also encrypts user login information.

  While Fon began as a small startup in Spain, it has since grown into a service accessed around the world and now with large-scale broadband providers in several countries. In 2007, for instance, it formed a partnership with British Telecom (BT), giving the telco’s three million broadband customers the option to join the network, which had nearly 200,000 global WiFi hotspots - the largest network of WiFi hotspots in the world at the time. Prior to BT, Fon also secured partnerships with such providers as the United States’ Time Warner Cable and France’s Neuf. While some Internet Service Providers continue to prevent their customers from sharing broadband, others recognize that including access to free WiFi hotspots outside of the home makes broadband packages more appealing to potential customers. BT, for example, boasts that its subscribers don’t just get a broadband connection in their house, but also access “from a park bench in New York, to a bus stop in London, to an apartment in Tokyo.”

  BOX 6.4.13

  Fon (Spain and International)

  Source: "What Is Fon?" British Telecom. N.p., n.d. Web. http://www.btfon.com/

  "How It Works." FON. N.p., n.d. Web. http://corp.fon.com/how-it-works

  Schonfeld, Erick. "Fon Inks Deal With British Telecom." TechCrunch. N.p., 4 Oct. 2007. Web. http://techcrunch.com/2007/10/04/fon-inks-deal-with-british-telecom/

  Service subsidization

  Under service subsidization policies, the government offers a refund on the cost of broadband access.

  The Australian Government’s Education Tax Refund (ETR) offers parents, caregivers, legal guardians, and independent students refunds on the education expenses of primary and secondary school children. These costs can include computers and Internet connections, as well as such items as educational software, textbooks, and school supplies. Recipients for this tax refund qualify based on their Family Tax Benefit (FTB) eligibility. Beneficiaries of FTB must demonstrate that they:

  • Have a dependent child under 16 years of age or

  • Have a dependent child between the ages of 16-20 years who has completed a Year 12 or equivalent qualification, or who is undertaking full-time education or training leading to a Year 12 or equivalent qualification, or who is exempt from this requirement, or

  • Have a dependent full-time student 21–24 years of age, and

  • Have care of the child for at least 35 per cent of the time, and

  • Meet the income test, and

  • Be an Australian resident, or a special category visa holder residing in Australia, or the holder of a certain type of temporary visa.

  Claimants of the ETR must demonstrate that they have qualifying education expenses and received FTB. In order to receive the refund, eligible candidates must keep their receipts, which serve as proof of their claims. Before claiming the refund, individuals must first have their FTB Part A claim approved. They can then either submit the claim with their individual tax filings or complete a separate ETR request form.

  Per the ETR website, the refund covers the expenses of the following items, many of which encourage students’ home computer use:

  • Home computers and laptops

  • Computer-related equipment such as printers, USB flash drives, and disability aids to assist in the use of computer equipment for students with special needs

  • Computer repairs

  • Home internet connections

  • Computer software for educational use

  • School textbooks and other printed learning material, including prescribed textbooks, associated learning materials, study guides and stationery, and

  • Prescribed trade tools for secondary school trade courses.

  While the website provides an ETR calculator, it also offers guidelines in terms of what items can be claimed and the amount of the deduction. A full-time caregiver, for instance, can claim 50% of eligible education expenses up to $794 (to receive $397) for each primary school child and $1,588 (to receive $794) for each secondary school child. The same amounts apply to individuals who share the care of a child.

  In 2011, the program cost approximately $4.4 billion and reached 1.3 million Australian families. The government used television, print, radio, and online advertising to target eligible families. The 2012 Budget introduced the new Schoolkids Bonus, which will replace the Education Tax Refund. Through this new item, eligible families will automatically receive annual payments of $410 for each primary school child and $820 for each secondary school child.

  BOX 6.4.14

  Education Tax Refund (Australia)

  Source:

  "Education Tax Refund." Australian Government, n.d. Web. 14 Dec. 2012.

  Gillard, Julia. "Helping Australian Families with Back-to-school Expenses." Australian Labor News. N.p., 6 Jan. 2011. Web. http://www.alp.org.au/federal-government/news/helping-australian-families-with-back-to-school-ex/

6.4.3 Device Ownership as a barrier to adoption

In the introduction of this chapter, it was indicated that broadband access requires devices capable of accessing the Internet, ranging from computers supplemented with a modem (called USB modem, dongle, or air card) to smartphones, netbooks, and tablets. Beyond service pricing, broadband economic adoption obstacles are linked to device prices. This section reviews the trends in device pricing and presents policy initiatives aimed at reducing the purchasing cost. It focuses on two areas: personal computers and mobile devices.

Before reviewing the policies that could be potentially implemented for reducing the access cost of devices, it is important to mention that device pricing has been consistently declining driven by a reduction of production costs (manufacturing economies of scale and component costs) and increasing demand. The decline has been even more abrupt if quality and performance improvements are factored in. For example, Kopecky (2008) compared the personal computer price index with its quality index between 1977 and 2004, and pointed to a 25% per year decline in quality-adjusted prices with an equal rise in demand (see figure 6.28). 

Image

FIGURE 6.29

Price and quantity Indices for Personal Comptures (1977-2004)

Source: Kopecky (2008)

Retail pricing of personal computers ranges currently between US$ 275 and US$ 1,600, a decline from US$ 800-US$ 2,500.* Moreover, prices for refurbished devices can reach between US$50 and US$ 100.

The decline in smartphone prices has been significant, if not more dramatic than in the case of personal computers. Table 6.21 presents pricing and performance data for the different generations of the popular Apple iPhone. 

Date	Model	Price	Memory	Features
June 2007	iPhone	$499, $599 (only through contract with ATT)	4GB, 8GB	Multi-touch screen, up to 16GB of storage, 620MHz processor, 2-megapixel camera for still images, USB dock
July 2008	iPhone 3G ("iPhone 2")	$199, $299 ($599, $699 without contract)	8GB, 16GB	Assisted GPS
June 2009	iPhone 3GS	$199, $299 ($599, $699 without contract)	16GB, 32GB	Up to 32GB of storage, 833MHz processor, 3.0-megapixel camera that included video recording, digital compass, voice control, Nike+
June 2010	iPhone 4	$199, $299 ($599, $699 without contract)	16GB, 32GB	Bigger battery, 1GHz processor, 5.0-megapixel camera with LED flash, HD video recording
October 2011	iPhone 4S	$199, $299, $399*	16GB, 32GB, 64GB	Intelligent voice recognition; an A5 processor; an 8-megapixel camera; dual antennas so that it can be used almost anywhere in the world
September 2012	iPhone 5	$199, $299, $399	16GB, 32GB, 64GB	20 percent lighter than the iPhone 4S; an A6 processor, a new dock connector, LTE data connection, a boosted audion system, 8-megapixel FaceTime HD; longer battery life, improved graphics

TABLE 6.21

Price Performance of the Apple iPhone (by Model)

Source: http://abcnews.go.com/Technology/iphone-features-apple-smartphone-evolved-introduction-2007/story?id=17226964#3

While introductory subsidized price of the first iPhone model was US$499 (with 4 GB of memory), the current model (iPhone 5) starts at US$199 (with a minimum of 16GB and a wide range of features.

Even if the iPhone is targeted at higher income segments in the emerging world, manufacturers such as Huawei and Nokia are offering low-priced smartphones. For example, Huawei in partnership with Safaricom launched an US$ 80 Android phone in Kenya. Still, carriers in the emerging world consider that $50 is a suitable price point for a smartphone.

In late-2012, the Samsung Galaxy overtook the iPhone as the world’s best selling smartphone, a reflection of its efforts to target a larger user base though phones with a broad range of features at various price points. Apple has released 6 models of the iPhone since 2007, with each version seen as a successor to the previous model. In contrast, since 2009 Samsung has released more than 20 versions of the Galaxy with models and prices varying for targeted demographics. Much of the success of the phone has been credited with its ability to simultaneously market the high-end models in developed economies while pushing cheaper models to capture key markets like India, China, and Brazil.* 

The iPhone operates on the iPhone Operating System (iOS), but all Galaxy phones feature the Android operating system and thus compete with other Android smartphones. Considering that certain Internet access devices still remain out of reach of disadvantaged segments of the population in the emerging world, governments have at their disposal a range of policy models aimed at tackling the device affordability barrier. The following sections review first programs aimed at reducing the purchasing cost of computers, and then present initiatives focused on handsets, primarily smartphones.

Date	Model	Price	Memory	Features
June 2007	iPhone	$499, $599 (only through contract with ATT)	4GB, 8GB	Multi-touch screen, up to 16GB of storage, 620MHz processor, 2-megapixel camera for still images, USB dock
July 2008	iPhone 3G ("iPhone 2")	$199, $299 ($599, $699 without contract)	8GB, 16GB	Assisted GPS
June 2009	iPhone 3GS	$199, $299 ($599, $699 without contract)	16GB, 32GB	Up to 32GB of storage, 833MHz processor, 3.0-megapixel camera that included video recording, digital compass, voice control, Nike+
June 2010	iPhone 4	$199, $299 ($599, $699 without contract)	16GB, 32GB	Bigger battery, 1GHz processor, 5.0-megapixel camera with LED flash, HD video recording
October 2011	iPhone 4S	$199, $299, $399*	16GB, 32GB, 64GB	Intelligent voice recognition; an A5 processor; an 8-megapixel camera; dual antennas so that it can be used almost anywhere in the world
September 2012	iPhone 5	$199, $299, $399	16GB, 32GB, 64GB	20 percent lighter than the iPhone 4S; an A6 processor, a new dock connector, LTE data connection, a boosted audion system, 8-megapixel FaceTime HD; longer battery life, improved graphics

TABLE 6.21

Price Performance of the Apple iPhone (by Model)

Source: http://abcnews.go.com/Technology/iphone-features-apple-smartphone-evolved-introduction-2007/story?id=17226964#3

• 6.4.3.1 Programs to reduce the cost of purchasing Personal Computers, Laptops, and Netbooks

  Three types of programs have been implemented to overcome the personal computer ownership barrier. The first one focuses on the provision of subsidies to reduce the acquisition price of devices. The target in this case could be either households at the lower end of the socio-demographic pyramid, students all the way from primary school to university, and SMEs, especially micro-enterprises.

  The second program is typically targeted at students in primary education, with governments distributing “one Computer per Child”. In this case, computers are provided free of charge to students in public schools.

  The third type of initiative entails a reduction of the access price by eliminating or decreasing taxes paid at time of purchasing. Levies affected by this measure could range from sales tax, import duties, and even sector-specific levies.

  Targeted subsidies

  While tax reduction could be an indirect subsidy, this section will address initiatives such as vouchers or the provision of lower priced devices for qualifying segments of the population (e.g. students).

  In 2009, more than half of China’s population lived in the rural parts of the country, where the average per capita annual income was a mere US$ 700 (approximately 25% the average income of urban residents), broadband penetration rates were lower than in the urban areas, and the region’s personal computer market was nearly untapped. During this time, on a global level, PC shipments had decreased and both company and consumer spending had dropped. In China, however, 40 million PCs were sold annually and it remained the world’s second largest computer market behind the United States, a trend the Chinese government hoped to continue to prevent the country from falling into a recession. As layoffs became more of a reality, the government feared that further economic downturn could lead to social unrest.

  To support economic growth and stimulate spending in rural areas, the Chinese government announced a subsidy program offering a 13% rebate to rural residents buying select products. The subsidies were designed to help domestic and multinational PC manufacturers alike increase their sales to the country’s under-developed regions, particularly after national computer demand fell in the last quarter of 2008. Forecasters had initially predicted a 9% growth for 2009, but subsequently lowered that figure to 3%. The rural computer subsidy project came as part of a larger US$ 586 billion subsidy program to increase demand for 

  home electronics, known as the Home Appliance Subsidy Program. Beyond directly impacting the manufacturers, the component makers and retailers also felt the benefits of the stimulus.

  The government identified 14 vendors that could participate in the program and sell low- priced PCs in rural China, which would not only make computers more affordable but would also spur competition in the industry. The winning bidders included four large multinational and ten local PC vendors. The tender was valid for one year in thirteen provinces. Manufacturers created products specifically designed for the project in order to qualify and two-thirds of the computer models offered were priced under US$ 500, with all models ranging in price from US$ 290 to US$ 510. Lenovo, China’s largest PC maker, for instance, offered 15 computer models beginning at US$ 365 and announced plans to expand its sales network to 320,000 villages by 2012 as a result of the program. Competitor Hewlett-Packard also offered 15 eligible desktop and laptop computers equipped with agricultural and educational software.

  In the rural market, vendors must tailor their advertising and products accordingly to meet region specific demands. The PCs are built, for instance, with potential variations in power supply voltage – a frequent problem in rural areas – in mind. The computers many times also come with special software for farmers, like inventory management programs. Analysts say that in order to see success in China’s smaller cities, PC vendors must ensure physical proximity to their customers. Rarely will citizens in rural areas have the means or the desire to drive for hours to buy a computer. To catch potential consumers’ attention, Hewlett- Packard sponsors variety shows and film screenings and offers product demonstrations in small towns. It also sent buses equipped with its products to elementary schools to advertise and to train students on how to use their technology. Competitor Lenovo began marketing its computers as luxury wedding gifts, employing the slogan, “Buy a Lenovo PC, Be a Happy Bride,” and delivering them in large, conspicuous boxes. The company also has a flashy showroom with a section of the store devoted to products designed specifically for rural use.

  Nearly 60% of all rural residents – or 200 million households - qualified for a subsidy. Initial estimates expected the program to generate the sales of 800,000 computers.

  BOX 6.4.15

  Computer Subsidies (China)

  Source:

  Chao, Loretta. "PC Makers Cultivate Buyers in Rural China." Tech Journal. Wall Street Journal, 24 Sept. 2009. Web. http://online.wsj.com/article/SB125366214543432237.html

  Lemon, Sumner, and Owen Fletcher. "China Offers Computer Subsidy for Farmers." Desktops. PCWorld, 5 Mar. 2009. Web. http://www.pcworld.com/article/160750/article.html

  He, Helen, and Simon Ye. "Rural China PC Program Will Increase PC Shipments in 2009 | 909330." Gartner, 10 Mar. 2009. Web. http://www.gartner.com/id=909330

  The Dutch General Directorate of Telecommunication and Post (DGTP) partnered with the Ministry of Economics to develop the Kenniswijk Project in 2001. Creating an experimental environment, the project provided residents of Eindhoven, Helmond, and Nuenen with innovative computers, mobile, and Internet products two years ahead of the rest of the country free of charge, resulting in a “consumer market of the future.” Providers would offer innovative ICT infrastructure and services while consumers had the opportunity to use them and enjoy their benefits. 

  Deemed “a vision of the broadband future,” this experiment allowed the ministry to examine the social and economic effects of increased ICT and broadband access within a community as researchers closely monitored the impact digital service had on households. By understanding the impact of broadband, this analysis of the project served as a best practices guide and shaped the development of future technology. It also promoted a synergy between infrastructure deployment and service provision. Ultimately, the government hoped that such a project would increase the Netherlands’ international competitiveness and attracts business from international ICT firms.

  The Kenniswijk.nl foundation organized the project. By 2002, however, Kenniswijk BV, a public-private organization that coordinates broadband services and infrastructures though subsidies for companies and consumers took control of the implementation of the Kenniswijk Project. Kenniswijk BV encouraged companies and institutions to make use of the subsidies, and the project ultimately grew into collaboration between 27 private and public parties. The organization oversaw the facilitation, motivation, and support of the involved organizations.

  Participants in the project received triple-play broadband services, including TV/video, telephony, and Internet. This physical network was open to multiple services providers, which in turn stimulated competition and encouraged innovation, particularly in areas such as e-health and distance learning. The technology also enabled citizens to change their services to meet their individual needs without involving a third party.

  In its part, the government allocated a total US$ 40.5 mn toward the project. Roughly US$ 11 mn went toward infrastructure development subsidies, which included a US$ 700 discount per user and allowed for more than 15,000 connections. The national subsidies included US$ 31,000 for “small services” and US$ 356,000 for “large services.” Regional subsidies covered up to US$ 35,600. Participants in the program received a free 10 Mbps Internet subscription for the first year and were not charged additional connection costs. The 10,000 subscribers received newsletters every 2 – 4 weeks and had access to the project’s website and helpdesk. Volunteer organizations and visitor centers were also encouraged to take advantage of subsidies to put the technology to use.

  In total, the endeavor spurred approximately 1000 new project ideas, 300 of which were turned into concrete project plans and subsidy requests. 135 were ultimately approved. Admittedly, the unstable economy in 2001 – 2002 resulted in delayed market investments, initially hurting the project’s uptake. Prior to 2004, the project saw a low amount of services, connections, and subsidy requests. Engagement with the private sector and the inclusion of OnsNet Nuenen into the Kenniswijk project spurred the number of requests and connections and contributed to growth.

  The project ended in October 2005, resulting in a total 15,000 FTTH connections and 135 services in Kenniswijk. Through this experiment, policy makers learned a great deal regarding motivating companies to install infrastructure and users to subscribe to a service. Even once the project ended, more than 80% of households continued to use the fiber connection. Following the success of this project, nearby towns implemented similar programs based on the same approach.

  BOX 6.4.16

  Kenniswijk Project (Netherlands)

  Source: Box Credit

  "Dutch National Project for Broadband Innovation Selects PacketFront for Its next Generation FTTH Platform." PacketFront, 10 Nov. 2004. Web. http://www.packetfront.com/en/news_events/press_releases/2004/009.html

  Kramer, René, Alex Lopez, and Ton Koonen. "Municipal Broadband Access Networks in the Netherlands." Proc. of AccessNets, Athens. Breath, 4 Sept. 2006. Web. http://w3.ele.tue.nl/fileadmin/ele/TTE/ECO/Files/Pubs_2006/Kramer_AccessNets_06_presentation.pdf

  Distribution of free devices

  These programs are more prevalent with regards to computer distribution, although they could be extended to other broadband access devices such as smartphones.

  Established in 2000 to offer sustainable, low-cost ICT and Internet services to all Namibian schools, the not-for-profit organization SchoolNet Namibia also provided training and support to empower youth through these tools. In partnership with local telcos and international development agencies, it brought affordable computers and solar-power computer labs to schools while promoting free and open source software solutions, Creative Commons licensed educational content, and discounted flat-rate wireless Internet services. Using free and open source software offered cost-reduction and scalability advantages and made sharing and adaptation easier for local communities. Two years after its founding, SchoolNet created its own ISP, XNet, allowing schools to access the Internet through dial-up or wireless (spread-spectrum WIFI in the ISM 2.4GHz band and 2.6GHz band) connections.

  Following the success of the program, SchoolNet took an active role in advising Namibian policy makers on ICT matters. The national government recognized SchoolNet as a major force in promoting ICT rollout and its role in job creation, all in line with the country’s National Development Plans for 2000 – 2010. The organization also served as an example for subsequent sustainable ICT in education projects undertaken in regions across Africa. On a higher level, the initiative focused on digital inclusion and creating an effective ICT program that could be easily replicated.

  The Swedish International Development Cooperation Agency offered ongoing financial assistance, which totaled nearly US$ 3 mn. Funding also came from other government aid agencies, including Canada’s International Development Research Center (IDRC) and the United States Agency for International Development (USAID). Telecom Namibia, the country’s incumbent telco, formed the aforementioned ISP, offering schools a flat-rate Internet package for US$ 25 per month. The provider also brought free dial-up access to schools for a discounted rate. Those schools that could not afford services qualified for cross- subsidies from schools with more resources. ICT volunteers assisted in basic ICT and support. Each of the labs held five computers - many of which were refurbished and came equipped with the Open Source Linux 7 operating system – that were connected to a server and a printer.

  In just five years, the project afforded 300 schools the opportunity to set up computer labs and connect to the SchoolNet ISP. The network also connected additional libraries, teacher resource centers, and NGOs. By the end of the project, the ISP boasted more than 180,000 regular Internet users, compared to the 11,000 users of the next largest commercial provider.

  The program ultimately dissolved in 2009 amidst criticism from the Ministry of Education.

  BOX 6.4.17

  SchoolNet Project (Namibia)

  Source:

  "SchoolNet Namibia." Panafrican Research Agenda on the Pedagogical Integration of ICTs. ERNWACA, 28 Feb. 2009. Web. http://www.ernwaca.org/panaf/spip.php?article567 

  "Broadband Strategies Handbook." Ed. Tim Kelly and Carlo M. Rossotto. The World Bank, 2012. Web. https://openknowledge.worldbank.org/handle/10986/6009

  "The Case of SchoolNet Namibia." WikiEducator. N.p., 9 Oct. 2010. Web. http://wikieducator.org/The_Case_of_SchoolNet_Namibia

  Du Buisson, Uys, and Chris Morris. "Schoolnet Namibia." First Mile First Inch. N.p., Mar. 2005. Web. http://www.fmfi.org.za/wiki/index.php/Schoolnet_Namibia

  In 1996, United States President Bill Clinton signed the Executive Order 12999 “to ensure that American children have the skills they need to succeed in the information-intensive 21st century.” This order led to the enactment of the Federal Computers for Learning Program, which donated “retired” federal government computers and ICT equipment to eligible schools and education-related nonprofit organizations free of charge. The program targeted pre- kindergarten (age 4) through high school (age 18) students located within the pre-determined “federal rural empowerment zones” that consistently suffered from high poverty and unemployment rates. In doing so, the program aimed to promote sustainability and economic development in otherwise disadvantaged communities.

  The program benefits the schools, many of which face shrinking budgets and cannot otherwise afford computers to keep up-to-date with the changing environment of modern technology. At the same time, the federal government disposes of approximately 10,000 computers – many of which are only three years old – every week. As such, it also supports current President Barack Obama’s commitment to “zero waste in government,” ensuring that this equipment is put to use.

  When the program first began, most schools received basic IBM-compatible personal computers, though Pentium-based systems and occasional Apple computers were donated as well. Beyond computers, the government agencies also donated modems, routers, services, ICT equipment, and research technology. While the agencies also offered software to some schools, these donations were contingent on licensing and permits. The schools and organizations did not pay for the computers or the equipment, but did pay the shipping and handling costs as well as the refurbishing costs when applicable.

  The United States General Services Administration (GSA) facilitates and sponsors the program, but schools must be proactive and register for the program themselves. To participate in the program, qualifying schools applied through the Computers for Learning website. Once registered, the website offered tools and resources that enabled schools to:

  • Create an overall plan for addressing computer needs

  • Assess the suitability of different types of available computer equipment

  • Request donated Federal computers

  • Contact a member of the Computers for Learning Partnership for free shipping

  • Find assistance if computers require upgrading

  • Find National Tech Corps volunteers, and

  • View other registrants' registration information

  The CLP website offers a “Success Stories” section, where schools can write in to share the impact the computers have had. One 9th grade teacher from Maryland wrote that after spending just five minutes registering on the site, the school received 252 computers, equipping every classroom with a computer and allowing teachers to incorporate the technology into their lesson plans. Other teachers commented on the quality of the computers, noting that not one required repair or lacked sufficient speed or memory capacity.

  By mid-2012, the program donated nearly 360,000 computers and equipment – worth more than US$ 317 million – to thousands of schools and organizations throughout the country.

  BOX 6.4.18

  Federal Computers for Learning Program (United States)

  Source:

  Longley, Robert. "Surplus Computers: Free for Schools." US Government Info. About.com, n.d. Web. http://usgovinfo.about.com/library/weekly/aa060901a.htm?p=1

  Computers For Learning. U.S. General Services Administration, n.d. Web. http://computersforlearning.gov/

  "Computers for Learning Puts Information Technology in Classrooms." U.S. General Services Administration, 12 June 2012. Web. http://www.gsa.gov/portal/content/136867

  In 2011, the Seoul government launched its “Smart Seoul 2015” program, expressing its commitment to “making Seoul the ‘best smart technology’ city in the world by 2015.” The program addresses infrastructure expansion and information security as well as ICT services and e-government programs. To promote e-government services, for example, it focuses on communication with citizens, convenience, and a campaign against the negative aspects of increased information access. At the time, Seoul’s e-government had already ranked first place amongst the World’s 100 Cities for four consecutive years, serving as “a benchmark for countries and cities around the world.”

  With an emphasis on ICT and smartphone use amongst all segments of the population - regardless of factors such as age or income – Smart Seoul 2015 incorporated programs to distribute technology to disadvantaged groups. For instance, the city provides Braille terminals and magnifying devices to the disabled and the visually impaired. The program also offers PC repair, Internet addiction projects, and training courses.

  In August 2012, the government announced that it would provide homeless shelters with free smartphones and wireless Internet services. The provision of ICT falls under the government’s larger Social Networking Service Education Program, which focuses on training and skill building amongst the city’s homeless population. The smartphones will not only allow these citizens to search for employment opportunities from any location, but also to reconnect with their families and friends and interact with other members of the community.

  Citizens of Seoul can donate their used smartphones to the Seoul Metropolitan Government, which then distributes the devices to the residents of the shelters. The government also offers workshops at the shelters, which residents must complete prior to receiving the phone. The training encourages utilization of social networking services and mobile applications. Each smartphone comes with a US$ 20 credit, but the phones will still work in free Wi-Fi areas once all credit is used.

  BOX 6.4.19

  Smartphones to the homeless (Republic of Korea)

  Source:

  Africa, Clarice. "Seoul to Provide Homeless Residents with Smartphones and WiFi." FutureGov, 31 Aug. 2012. Web. http://www.futuregov.asia/articles/2012/aug/31/seoul-provide-homeless-residents-smartphones-and-w/

  Sung-Mi, Kim. "Seoul Proves Value of Advanced E-Government." Korea IT Times, 9 Jan. 2012. Web. http://www.koreaittimes.com/story/19299/seoul-proves-value-advanced-e-government

  The Intel World Ahead Program, inspired to enable more first time users online, and by the low cost pre-paid mobile broadband programs in Sri Lanka and Vietnam, recognized the opportunity for an affordable solution that includes connectivity, a computing device, and beneficial content, to address all of the demand side gaps that consumers face. In fact, through initial research, it was discovered that in the total cost of ownership, the largest affordability gap was actually the cost of the broadband subscription, when compared over a 4-year period. In fast-growing developing countries (such as Brazil, China, Indonesia, Malaysia, Mexico and Russia), broadband access can account for 60-80% of the total cost of ownership of a PC. Often, only about 20% of citizens could afford the monthly plans. Piloting the program in early 2011, working with service providers, equipment providers, content providers, and governments, new low cost solutions were created, including entry- level notebooks, compelling content, and prepaid broadband, accompanied by exciting advertising, branding and marketing, to enable and encourage first time users to get online.

  The pilot results were impressive, and by the end of 2011, all eight pilots were complete, enabling more than one million people with entry level PCs, content, plus prepaid broadband packages. These programs also encouraged the PC industry to aggressively lower prices to as low as $200, and encouraged content providers to create exciting new content. In one example in Vietnam, the telecom companies, Viettel and VNPT, offered 700MB of data download for just $2 prepaid. At that price, broadband affordability surged from 12% to 70% of citizens. Early results from the program also showed that stimulating demand is more than just price; it’s also about delivering meaningful content and applications. For example in Kenya, Safaricom package include not only entry-level netbooks, and pre-paid broadband but valuable content, including British Council ‘Learn English’ software, Education applications such as Intel® Skoool and Encyclopedia Britannica, as well as McAfee safety applications. In addition, they come with 1.5GB of free data download. This is a very compelling offer that enhances education and learning, and runs far better on a PC than over a phone or tablet.

  Today, successful programs are running in over 45 countries worldwide, and have enabled over 15 million new users to get online. With the Total Cost of Ownership (TCO) often reduced to 2/3 of the previous cost (see Table), over one billion people can now afford to enjoy technology benefits for the first time.

  BOX 6.4.20

  Reaching the Third Billion: Bringing the Prepaid Miracle to Broadband

  Source:

  The state of Broadband 2012: Achieving Digital Inclusion For All, Broadband Commission Report, September, 2012 http://www.broadbandcommission.org/Documents/bb-annualreport2012.pdf 

  "Intel World Ahead Program: Connectivity." Intel. N.p., n.d. Web. http://www.intel.com/content/www/us/en/world-ahead/intel-world-ahead-program-connectivity.html

• 6.4.3.2 Programs to reduce the cost of purchasing mobile devices, smartphones, and tablets

  This section addresses issues similar to that of computer devices but for mobile access equipment. 

  Every year, South African mobile phone subscribers on contract plans receive free or heavily discounted top of the line devices from the country’s three main service providers, which offer the perk in an effort to stay competitive in the market. Initially, this subsidy attracted new users – particularly among the country’s lower classes - and encouraged contract plans, but now that the market is well-established and South African mobile phone penetration rates exceed 100%, providers are reconsidering this strategy. At this stage, the subsidies also pose a problem for new entrants that may not have the financial backing necessary to give away handsets to attract customers the way MTN and Vodacom can. When Cell C entered the market in 2001, for instance, it had no choice but to offer handset subsidies, negatively impacting the operator’s early earnings. By the time operators recouped enough money to justify the subsidy, the contract was up and customers expected a new phone.

  Further, rather than working to improve technology access amongst potential low-income customers, the subsidies are more often used to attract high-end subscribers, particularly as average revenue per user decreases with increased penetration amongst all socio-economic classes. Lower end, prepay customers also have access to the originally subsidized phones through the second hand market.

  As providers expand their operations into other regions in Africa that typically come with high business risks, they are forced to accrue large debts and thus cannot afford to lose money in the relatively more lucrative South African market. With such a large proportion of their earnings going straight to the bank to pay off interest loans, the operators must find a balance in the cost of acquiring new customers. To this extent, while the device subsidies may have initially increased mobile phone penetration in South Africa, these same subsidies may now be responsible for holding back market growth in neighboring regions. Additionally, as governments impose taxes, tariffs, and duties, the operators must continue to focus on cutting costs. Ultimately, at this stage, profitability trumps subscriber numbers.

  In the meantime, however, subsidized phones may soon lead to higher profit margins in South Africa as operators push customers to utilize high value services like mobile broadband and applications. These services will require smartphones, which most consumers cannot afford without a discount. In many African countries, disposable income serves as the largest barrier to broadband uptake. If providers continue to subsidize devices, particularly smartphones, they could in turn increase Internet and broadband access in this region. If these subsidies prove too costly to justify, providers could experiment with different pricing packages or partner with the government to make the devices more affordable.

  MTN, Vodacom, Cell C and others have invested heavily in their high-speed networks to increase capacity and both meet and encourage the demand for high-speed broadband. Declining prices – and incentives like device subsidies – are expected to contribute to a growing broadband market.

  BOX 6.4.21

  Free Devices (South Africa)

  Source:

  "SA's Mobile Companies May Reconsider Cellphone Subsidies." Issue No 174. Balancing Act, 12 Jan. 2012. Web. http://www.balancingact-africa.com/news/en/issue-no-174/telecoms/sa-s-mobile-companie/en

  Mobile in South Africa – Contributing to Improved Economic and Social Outcomes. Rep. Indepen (for Vodacom), 8 Sept. 2005. Web. http://www.indepen.uk.com/docs/mobile-in-south-africa.pdf

  Mochiko, Thabiso. "African Numbers Driven by Rise in Mobile Voice, Internet Services." Business Day Live. N.p., 10 Oct. 2012. Web. http://www.bdlive.co.za/business/technology/2012/10/10/african-numbers-driven-by-rise-in-mobile-voice-internet-services

  In an effort to make broadband contract plans more appealing to consumers, many telcos go beyond mobile phones, also subsidizing modems, computers, and tablet devices with high- data contract agreements. With these contracts, subscribers may qualify for devices with no up-front charge in exchange for committing to long-term plans that promote the use of high- value services like Internet access. The revenue generated by these services justifies the cost of the equipment for the providers, and contracts usually have high early termination fees to guarantee that they can recoup the cost.

  In 2008, for instance, AT&T Mobility began subsidizing laptops. As a result, data revenue in the fourth quarter of that year rose 51.2% when compared to 2007’s fourth quarter results. To do so, AT&T partnered with Lenovo to offer customers laptops with embedded 3G modems for US$ 150 off when signing a two-year mobile data plan. To qualify for this offer, users signed up for AT&T’s $60 / month service, “DataConnect.” The embedded modems could handle download speeds up to 1.7 Mbps and uplink speeds up to 1.2 Mbps, but only worked with DataConnect. As part of the contract, users could terminate the agreement early for $175.

  By 2012, however, this practice no longer produced the same returns, largely due to the saturation of the market. While the subsidization of smartphones continues to make sense, the practice does not hold for the tablet market, where consumers tend to buy models designed for Wi-Fi and not cellular use. In August, AT&T announced that it would no longer subsidize tablets. AT&T continues to sell tablets, however, but at non-subsidized prices. As a result, the cellco’s tablet data plans do not have a built-in commitment and are slightly cheaper than previous offers. The price point increases based on data; 3GB plans cost consumers $30 per month while 5GB plans run for $50 per month. Shared data plans run for $10 / month plan.

  Competitor Verizon has also faced recent financial challenges as a result of device subsidies. In July 2012, the operator announced that it would no longer offer unlimited data plans to new customers. While the operator insisted that subscribers would benefit from shared data plans, amidst criticism, it reversed this decision. To compensate, subscribers who received subsidized plans will no longer have the option for an unlimited plan.

  BOX 6.4.22

  Device Subsidies (United States)

  Source:

  "Broadband Strategies Handbook." Ed. Tim Kelly and Carlo M. Rossotto. The World Bank, 2012. Web. https://openknowledge.worldbank.org/handle/10986/6009

  Chacos, Brad. "AT&T Stops Offering Subsidized Tablets." LAPTOP. N.p., 20 Aug. 2012. Web. http://blog.laptopmag.com/att-stops-offering-subsidized-tablets

  Reardon, Marguerite. "Verizon: You Can Have Unlimited Data... Just No Device Subsidies." CNET News. CBS Interactive, 17 May 2012. Web. http://news.cnet.com/8301-1035_3-57436642-94/verizon-you-can-have-unlimited-data.-just-no-device-subsidies/

  Perez, Marin. "AT&T, Lenovo Offer Subsidized Laptops." Information week. N.p., 30 Oct. 2008. Web. http://www.informationweek.com/mobility/3g/att-lenovo-offer-subsidized-laptops/211800321

  In an effort to increase their subscriber base, service providers and operators in Uganda have entered into partnerships with each other to offer lower-priced devices and services. By making such tools more affordable, cost of broadband becomes less prohibitive, in turn boosting the country’s overall uptake of the technology.

  International semiconductor manufacturer Intel introduced in 2012 a new sales model within its developing market territories, working with telcos to offer high-speed broadband and affordable computers. This strategy is expected to reduce the broadband and high speed Internet divide and strengthen these countries’ economies. In some instances, the model replicates the prepaid model that has boosted the demand for mobile phones, attracting first- time buyers who can only pay for services they can afford at the time.

  As part of this strategy, Intel partnered with Orange Uganda in May 2012 to offer subscribers a variety of lower-priced personal computers and high-speed broadband packages – all available at Orange retail stores. The arrangement benefits both the corporation and the telco; Intel will experience growth opportunities in the computing sector while Orange will more easily reach new users and increase subscriptions. As a result of increased access to ICT and consumer spending, Uganda will likely see a rise in GDP and digital literacy as well as integration of ICT into the education system. Further, as the populace becomes more comfortable with this technology and access and skills increase, the country will become more competitive in the global knowledge economy.

  This model is not the first time Uganda has seen partnerships between service providers that led to increased broadband affordability and adoption. In 2006, four of the country’s Internet Service Providers (ISPs) – Bushnet, SpaceNet, Africaonline and One2Net, all members of the Uganda ISP association – worked together to consolidate their purchase of bandwidth. This consolidation led to a 25% reduction in cost, which enabled them to reduce the rates of bandwidth purchased from them by schools by 75%.

  Prior to this partnership, each ISP had acquired approximately 5 – 6 Mbps per month for $5,000 - $6,000. When working together, they together acquired 50 Mbps at a wholesale price for buying in bulk. The providers could then pass these savings along to potential customers. One2Net, for example, had previously charged a flat rate of $600 per month for 64K speeds. Following the consolidated purchase, it reduced the price to $150 for individuals and $250 for businesses and offered higher speeds.

  At the time, the price of Internet to average individual users was prohibitively high and blamed for the country’s low broadband penetration rates. Users faced charges of approximately 14 cents per minute as a result of expensive bandwidth, which the ISPs also said hurt their business.

  BOX 6.4.23

  Operator Partnerships (Uganda)

  Source:

  "Intel Partners with Orange Uganda to Increase Access to "broadband PCs"" CIO East Africa. N.p., 9 May 2012. Web. http://www.cio.co.ke/news/top-stories/intel-partners-with-orange-uganda-to-increase-access-to-%22broadband-pcs%22

  "Uganda ISPs Join Forces to Purchase Cheaper Bandwidth." Issue 315. Balancing Act, 2006. Web. http://www.balancingact-africa.com/news/en/issue-no-315/internet/uganda-isps-join-for/en

6.4.4 Taxation as a barrier to adoption

The total cost of ownership of broadband is impacted by numerous taxes. On the services side, three exist:

• Value added tax: most countries impose some form of value-added tax, a general sales tax or similar consumption tax as a percent of the total bill;
• Telecom specific taxes: some countries charge an additional special communications tax as a percent of the service bill;
• Fixed taxes: in addition to the tax as a percentage of usage, some countries charge a fixed tax that could be either driven by general communications usage or wireless usage;

In addition to service-based taxes, other levies can be imposed on access equipment:

• added tax: these represent the taxes paid directly by the consumer at time of purchasing a personal computer or purchasing and/or exchanging a smartphone;
• Customs duty: this tax on imported equipment is already included in the retail price of the computer or the smartphone;

• Other taxes: telecommunications specific taxes on smartphones or computers (e.g. royalties calculated on the cost of the equipment);

• Fixed taxes: special fixed duties on smartphones, such as ownership fees.

Countries do not follow a uniform approach to mobile services taxation. While all countries tax both services and equipment, the type of taxes selected and their amount vary significantly, with the consequential varying impact on total cost of ownership of a broadband device.

A scan of service taxation approaches across countries yields four categories:

• Universalization of service: Reduce taxes as much as possible to stimulate broadband adoption;
• Direct taxation without sector discrimination: high VAT while recognizing the distortion effect of sector-specific taxes;
• Direct taxation and sector specific taxes: combine VAT with a sector specific levy;
• Service tax revenue maximization: leverage broadband communications as a source of direct taxation, by combining high VAT, high sector specific taxes and/or a fixed levy;

While most developed and some developing nations reduce service taxes to promote universalization of broadband service, the pattern is not consistent across emerging countries. For example, the Africa and Asia Pacific continents comprise numerous nations with taxation approaches aimed at universalizing mobile services, while this approach is significantly less prevalent in Latin America (see table 6.22).

Image

TABLE 6.22

Service Taxation Approaches by Country

Source: Telecom Advisory Services, LLC. The impact of Taxation on the development of the Mobile Broadband Sector. London: GSMA, 2010.

Moving now to equipment (personal computers, smartphones) taxation approaches, four types can be identified, partly driven by the existence or not of import duty:

• Sector discrimination based on moderate import duty: VAT combined with low import duty;
• Sector discrimination based on high import duty but no telecom tax: high import duty and VAT but no sector specific taxes on handsets;
• Sector discrimination based on high VAT and import duty but low handset specific tax: combine high VAT with a sector specific levy;
• Equipment tax revenue maximization: leverage broadband communications as a source of direct taxation, by combining high VAT, high customs duty and a high sector specific levy, or low import duty and high sector specific tax

The most prevalent equipment taxation model around the world is based on VAT and, in some cases, low sector discrimination through moderate import duty (see table 6.23).

Image

TABLE 6.23

Handset Taxation Approaches by Country

Source: Telecom Advisory Services, LLC. The impact of Taxation on the development of the Mobile Broadband Sector. London: GSMA, 2010.

The combination of service and equipment taxation approaches yield four distinct models:

• Universalization and protectionism: this approach aims at reducing levies with the purpose of decreasing total cost of ownership and stimulating broadband adoption; it can include an equipment import duty and a sector specific tax (which is relatively low and therefore has minimum distortion potential);
• Protectionism: this approach is similar to the one above, except that high value-added taxes on service increase substantially the total cost of ownership;
• Sector distortion: this approach introduces sector specific service taxes with the objective of increasing government revenues but, in doing so, plays an economically distortion role by emphasizing taxes on the telecommunications sector;
• Tax maximization and sector distortion: sector specific taxes are introduced not only on broadband services but also on equipment with the purpose of maximizing government revenues, with the consequent distortion impact;

As pointed out before, prevalent taxation models tend to differ by region. As expected, most developed countries have adopted universalization and protectionism tax approaches given that they do not need to rely on the telecommunications industry to increase revenues for the treasury. In addition, there are a number of emerging countries, which have chosen a Universalization and Protectionism approach in order to stimulate telecommunications service adoption. Notable examples in this category are China, Angola and Malaysia.

In the next category of taxation approach -protectionism- emerging countries that have adopted pro-active ICT development strategies: India, Rwanda, Egypt, Chile and Kazakhstan can be identified. In other words, the first two taxation categories are associated with technology development objectives.

At the other end of the spectrum there are also some significantly large emerging countries - Mexico, Argentina, Brazil, Venezuela, Nigeria, Bangladesh, Pakistan - where the taxation approach runs counter to maximizing broadband adoption.

Image

TABLE 6.24

Overarching Taxation Approach by Country

Source: Telecom Advisory Services, LLC. The impact of Taxation on the development of the Mobile Broadband Sector. London: GSMA, 2010.

In this context, taxation could have a detrimental effect on the public policy strategy aimed at deploying broadband. The impact of these different taxation approaches on total cost of ownership of broadband service varies widely. For example, in Mexico the impact of taxes on total cost of ownership of mobile broadband is 18.4%, in South Africa it is 15.2 %, in Brazil it reaches 29.8 %, while in Bangladesh it is 54.8%. On the other hand, in Malaysia, the effect of taxes on mobile broadband cost of ownership amounts to only 6.1%. 

Taxation appears to have an impact on the deployment of mobile broadband. For example, ceteris paribus, there may be some association between the very high level of taxes in Brazil and its very low penetration level of 3G handsets. On the other hand, Malaysia shows a low level of taxes and a high 3G penetration rate. Similarly, an inverse relationship appears to exist between tax burden and adoption of data services when measured by wireless data as percent of service revenues (see figure 6.30).

Image

FIGURE 6.30

Taxation vs. Adoption of Data Services

Source: Katz et al. (2008); Wireless Intelligence; TAS analysis

If taxes limit adoption of wireless broadband, it is relevant to ask what the ultimate impact of reduced penetration might have on economic growth. A reduction of taxation on broadband devices, equipment and services could have a significant economic benefit (see figure 6.31). 

As figure 6.31 indicates a reduction of taxes on devices and service has a positive impact on broadband penetration as a result of the elasticities of demand (as discussed in section 6.4.3). The increase in broadband penetration improves the number of households connected per households served (in fixed broadband) and the number of mobile broadband subscribers per infrastructure deployed. This increase in penetration enhances the return on the network capital invested. A higher return on capital allows the broadband service provider to lower prices, which in turn has a positive impact on penetration.

At the same time, an increase in broadband penetration has direct and indirect effects. On the direct side, it means an improvement in the revenues of broadband operators and ISPs. On the indirect side, it enhances the contribution of broadband to economic growth and employment. Both effects increase the taxable base, which in turn grows the collected taxes beyond the amount foregone by reducing taxes on broadband devices and services. This effect yields higher welfare benefits.

• 6.4.4.1 Programs aimed at reducing taxation on access devices

  Some countries have reached the conclusion that while foregoing tax collections in the short run, a tax reduction strategy can result in additional adoption of devices and broadband usage, and consequently enhanced economic benefits in the long run.

  In 1998, the Swedish government enacted its tax rebate program, which encouraged employers to purchase home computers for their employees. The price of the computer was deducted from employees’ salaries as monthly repayments over a three-year period and employers received a tax credit for the purchase. The program was credited in part with the country’s rise in home computer penetration, which reached 90% by 2006.

  Amidst criticism, the government began scaling back in the program in 2004. It asserted that the mission was to increase computer use that would in turn increase productivity, not to give citizens top-of-the-line tax-free computers on which they could watch videos and play games. From this point forward, employees could no longer deduct more than US$ 1500 for the computers leased for them by their employers. As a result, employers then faced limits in the amount of VAT they could deduct. In December 2006, however, parliament sided with the government’s budget plan and eliminated the deductions all together. At this point, computers were valued at approximately US$ 360 and were considered an employee perk not a right, meaning that they had to pay tax on the assessed value.

  BOX 6.4.24

  Tax Rebate Program (Sweden)

  Source:

  "Broadband Strategies Handbook." Ed. Tim Kelly and Carlo M. Rossotto. The World Bank, 2012. Web. https://openknowledge.worldbank.org/handle/10986/6009

  "Sweden Tax Country Briefing." Economist Intelligence Unit, n.d. Web. http://www.chartisinsurance.com/_2590_377918.html

  To promote economic growth and sustainability within its country, the government of Pakistan committed to increasing ICT and broadband access through a universal service policy. The policy, which launched in 2007 and reflects a partnership with public and private companies, stressed affordable voice and data services, increased broadband access, and the development of telecenters. Funding comes through operator revenues, access promotion charges for mobile networks, and proceeds from spectrum auctions.

  Amongst other projects enacted through the fund, the computer purchase program made the home computers more affordable for students, government employees, and military personnel. For instance, all members of the Pakistani military receive automatic approval for a reduced-rate loan when purchasing a PC per a program established by Intel and the Ministry of Defense. Government employees and citizens requiring a computer for educational purposes qualify for a similar purchase program.

  The Allama Iqbal Open University aims to foster a 1:1 e-learning environment. In doing so, it launched a computer purchase program offering all of its 700,000 students – including its many remote distance-learning students – below-market-rate loans for Intel-based laptop computers. The program, which was created by the Higher Education Commission and Intel, works with local banks to finance the loans.

  In 2011, Intel partnered with Meezan, an Islamic bank in Pakistan, to launch “Laptop Ease.” In its first four months alone, the program, which offers a “large-scale hire-purchase scheme for personal computers,” provided 400 laptops to citizens with a 3 – 24 month repayment schedule. By 2012, the program aimed to increase this number to 250 laptops per month.

  BOX 6.4.25

  Computer Purchase Program (Pakistan)

  Source:

  Pakistan Expands Broadband Connectivity and ICT Services to Bridge the Digital Divide. Rep. N.p.: Intel World Ahead, 2008. Print. 

  "Intel Offers Laptop Loans in Pakistan." Reuters, 19 Oct. 2011. Web. http://www.reuters.com/article/2011/10/19/intel-sharia-pakistan-idUSL3E7LJ14920111019

  In January 2010, the government of Malaysia began offering a 100% capital expenditure tax allowance to operators investing in last-mile broadband equipment. This equipment and consumer access devices also qualified for import duty and sales tax exemptions. Further, the government offered an incentive to consumers, who received tax relief on the broadband subscription fee up to US$ 165. The country’s Inland Revenue Board (IRB) announced in 2011 that these tax benefits extended to smartphone broadband use as well. While the actual devices did not qualify for the additional personal computer tax incentive, tablets such as the iPad did. The Malaysian Income Tax Act 1967 states that the cost of a personal computer – up to US$ 1,000 – is deductible.

  The broadband relief plan, which ran from 2010 – 2012, was an attempt by the Malaysian government to match the broadband use of neighboring countries in the region. At the time of its enactment, for instance, Singapore and Korea boasted respective penetration rates of 88% and 95%, while Malaysia’s hovered at 26%.

  The plan also made broadband access more affordable for 100,000 local university students, who qualified for a laptop with free broadband for US$ 16 per month for 2 years. This package was made possible by Telekom Malaysia.

  BOX 6.4.26

  Broadband Tax Relief (Malaysia)

  Source:

  Chung, Yee Sye. Malaysia Broadband: A Leverage To National Growth. Rep. SKMM, n.d. Web. http://www.myconvergence.com.my/main/images/stories/SpecialEdition/pdf/MyConBumpe17_MalaysianBB.pdf

  "Broadband Users Relieved over RM500 Tax Relief." The Star Online. N.p., 24 Oct. 2009. Web. http://thestar.com.my/news/story.asp?file=/2009/10/24/budget2010/4970057