Research building the Broadband Performance Index and Broadband Market Model

Context and aimThe performance of the telecommunications industry – including the Internet – has become pivotal as economic and social activity is increasingly electronically mediated and transacted on-line. Having the appropriate instruments to measure the performance of the telecommunications industry is therefore of great importance. This contribution is aimed at presenting the development of a broadband performance measurement tool, the Broadband Performance Index and Broadband Market Model. It concerns a multi-year research project exploring and explaining the difference in broadband performance across EU Member States. Both fixed and mobile broadband are analysed. In this contribution we focus on fixed broadband.Theoretical framing and methodology appliedThe theoretical starting point is the well-recognized stylized model of industry performance: the Structure-Conduct-Performance paradigm. The SCP-paradigm is extended and tailored to fit the telecommunication market, whereby regulation is made explicit. Considering we are interested in relationships between several (dependent) variables and variables which cannot be measured directly, such as performance, structural equations modelling (SEM) is applied.Within the model intermediate variables have been defined: reflecting the institutional environment in which regulation operates (Regulatory Institutional Index – RII), reflecting the regulatory outcomes as they condition the operation of the telecommunications market (Regulatory Outcome Index – ROI), the elements of structure (Structure Index – SI) and conduct (Conduct Index – CI) as they determine the performance (Performance Index – PI). The data set used is composed from public sources combined with an extensive questionnaire completed by the National Regulatory Agencies under the auspices of BEREC, the body for electronic communications regulators in the European Union. The data collection took place in the period May 2012 until December 2012.ResultsOn the basis of our statistical analysis of the broadband market, a composite broadband Performance Index is derived that provides the best fit to explain the differences in fixed broadband performance across Europe. The components of this performance index are, in order of importance: (1) the cumulative broadband uptake (across all technology platforms) – this corresponds to the dimension ‘volume’; (2) the price (average revenue per user) – representing the ‘value’ for end-users; and (3) the percentage of households with a data rate at or above 10 Mbit/s on the down link – this variable corresponds to the quality. The interpretation of the derived weights is as follows: One extra percent in broadband uptake (or 1 Euro reduction in price, or an additional 1 % of lines above 10Mbit/s) contributes to an increase in the performance index score of 0.410 (or -1.81 or 0.03 respectively). Exploratory and confirmative factor analysis have been applied to determine the factors that drive broadband performance. The main results of the analysis are: investment levels, expressed per household, are the #1 driver of broadband performance. In turn investment levels are driven by GDP/capita, adjusted for purchasing power parity. An increase in GDP/cap by €1000 (corrected for purchasing power parity) is linked to an increase in the Performance Index by 0.736 points. Another important driver is the level of competition. However, the analysis shows that the Herfindal Hirschman Index provides counterintuitive results. This index needs to be replaced by a modified index (HHI*), which reflects the market shares associated with the different competitive platforms (PSTN, CATV, FttX, and the shares of access-based competitors). The influence of the HHI* on the Performance Index is 0.417. This HHI* is in turn driven by the level of LLU prices – as a regulatory input – and by the degree of urbanization. The indirect influence of the LLU price on the Performance Index is -0.374. This is the second largest driver of performance, after investments.