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Abstract -- Public Policies to Encourage High-Speed Residential Internet Access Policy Track
P4: Economics and Pricing

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Public Policies to Encourage High-Speed Residential Internet Access

Gillett, Sharon Eisner ( sharon@far.mit.edu)


While much of the Internet's amazing growth has been fueled by organizations connecting their enterprise networks to it, individuals connecting computers directly from their homes have also contributed. But anyone who has tried to use the full multimedia capabilities of the World Wide Web from home using even a 28.8 Kbps modem has seen that the ordinary residential telecommunications infrastructure is woefully underpowered for this task. Two enhancements to existing infrastructure have the potential to deliver a more satisfactory level of bandwidth for Internet connections to residential customers: ISDN telephone service, and cable TV networks upgraded to pass bi-directional data traffic.

As (Gillett, 1995) shows, for the same average bandwidth of 128 Kbps, an upgraded cable system allowing 500 Kbps of peak bandwidth costs less to provide than an ISDN system allowing only 128 Kbps of peak bandwidth per subscriber. Despite this advantage, Internet connections over ISDN, while hardly widespread, are much more available than residential Internet service via cable. This paper analyzes the salient factors in the business and regulatory environment that contribute to this difference, and outlines policy changes that would reduce the barriers to development of residential Internet service over cable plants.

The paper begins with an analysis of the organizational competencies required to offer high-speed residential Internet access over either ISDN or cable, summarized in Table 1:

Table 1: Key competencies are split across organizational boundaries

Competency or asset needed		Who has it
Physical communication infrastructure	Telephone and cable companies
Customer maintenance organization	Telephone and cable companies
Internet technology:	
  Physical connectivity			Internet providers
  General Internet know-how		Internet providers
  Technical customer support		To limited extent, Internet providers
  Internet over {ISDN, cable} know-how	Under development
Marketing and sales			Unclear
Brand name				Unclear
The clear split between competencies held by infrastructure and Internet providers serves as a road map for who needs to develop what competency in the future; in the meantime, it explains why high-speed residential Internet service is typically offered under a cooperative arrangement of some sort. The paper analyzes the business climate of such alliances, showing that because of the monopoly position of the infrastructure provider and the somewhat generic nature of the Internet product, infrastructure providers hold the lion's share of the power in any such relationship, including the power to enter the business in competition with the Internet provider. The paper examines the credibility of this threat, concluding that while such entry makes economic sense, organizational factors justify a healthy degree of skepticism regarding its success.

The paper then discusses differences in the policy environment that have contributed to the greater prevalence of Internet connections over ISDN vs. cable: the ability of both Internet providers and subscribers to connect to the telephone network in an open manner. Specifically, the ability of subscribers to purchase their own computer networking equipment for use with ISDN lines has led to the development of a competitive market for this equipment in which cost is declining and interoperable standards are beginning to emerge. In contrast, the cable modem market is technologically immature and non-interoperable. Similarly, Internet providers' ability to purchase ISDN circuits on a tariff (i.e. public price) basis creates a much lower barrier to entry than cable's requirement of a contractual negotiation with an infrastructure provider whose monopoly business model typically focuses only on video services.

The paper concludes with two policy recommendations to encourage alternatives in high-speed residential Internet access:

More infrastructure competition, particularly from wireless networks, will create new business opportunities for Internet access providers.

Gillett, S. E. (1995). "The Economics of Residential Internet Connections: Modeling Cable vs. Telephone Networks." MIT thesis (forthcoming).