Study of Factors Contributing to Broadband Diffusion and Policies
Nobuyuki TAJIRI, GITI, Waseda University
1. Background and Aim of Study
Broadband access is an Internet connection that is high-speed, always-on and flat-rate. It brings
great benefits to users and societies, and in recent years has been increasingly used in developed
countries. In most developing countries, however, it is available to only limited people, and so there
exists an international digital divide. In view of its importance, broadband must be encouraged as a
crucial policy issue. The government should identify which factors increase the take-up of broadband,and take measures accordingly.
This study analyses the spread of broadband in many countries to identify contributing factors andpolicy measures to encourage it.
2. Framework of Study
In order to clarify which factors help broadband to spread, this paper uses a generalized framework as
shown in Figure 1. The study verifies which factors have affected broadband diffusion, using recent
data from countries with differing environments. Then, for each contributing factor that is found to besignificant, it assesses whether and how much a policy measure such as local loop unbundling (LLU)
increases broadband access in the country. Based on the results, the study discusses which policy
measures the government should take.
<Demand Side>

Demand forBroadband

Factors to affect demand･income level・dial-up services･content/application･user capability, etc.

Broadband Service
terms and conditions(prices, speed, etc.)

Broadband
Diffusion

Supply for
Broadband
・DSL･Cable Modem･Others (FTTH, etc.)

Factors to affect supply
・existing networks
・market competition･demography, geography･technology, human capital<Background Factors>
Others（Socio-cultural
factors）

Policy/Regulation
Policy/regulation
to affect demand-demand stimulation-copyrights, etc.
Strategy,
political
system,Policy/regulationetc.
to affect supply-competition policy-support for networkbuilding

Others（Telecom carrier’s
financial basis andcommitment,etc.）<Supply Side>

Figure 1

Framework of Study (Factors contributing to Broadband Diffusion)3. Comparison of Broadband Diffusion Factors in Six Countries: Qualitative Analysis
Table 1 Factors Contributing to Broadband Diffusion in Japan, Korea, United States, France, United Kingdom and Thailand (Summary)(1) Demand-Side Factors
Broadband

Subscribers

perinhabitants

100

Japan

Korea

United States

FranceUnited Kingdom

Thailand

17.5

25.2

16.6

15.6

16.0

0.97

(2005, OECD, etc.）
Pricesofbroadband

serviceschanges

Huge price reduction,

price

since

Price reduction inwith entry of Softbank

triggered by Hanaro in

until early 2005, thenwith entry of Free (Iliad)

2004 with progress of2004 which led to

BB in fall 2001. After

2000, then increase in

reduction of DSL prices

inservice-based

increase in demand.

that,

demand.

and increase in DSL

increase in demand

Huge pricereduction

demandrapidly

Huge

price

reduction

price

Metered and highMetered and highFlat rate per month

accessContent/Applications

fall

2002,

then

change afterwards.

Metered and highMetered and highFlat-rate per call(partly flat-rate）(partly flat-rate）

Various online content

High-volume

content

LittleHigh-volume

content

Killercontent,

like programs provided

has

popularmulti-channel broad-has

popularor content is not

butstrongerby broadcasters. High

after

of

cast may have caused

since around 2004. Paceflat-rate

demand for such content

iTunes (in 2003) andincrease in demand forof broadband diffusion

brought by

YouTube (in 2005)

online content.

has speeded up from

much
for

restrictions

becomeemergence

popularity

ofon TV programs
capitaBut no further priceincrease in demand

There was demand forInternet access.
per

then

high-volume
demandGDP

reductioncompetition,

subscribers.

increase.
Prices of dial-up Internet

Littlebecomeapplications

seen.

that time

High

High

High

High

High

Lower-middle(2005,IMF)（35,757 US dollar）（16,308 US dollar）（42,000 US dollar）（33,918 US dollar）（37,023 US dollar）(2,659 US dollar)

PCs per 100 inhabitants,

High （54.15）

High （54.49）

High （76.22）

High (57.86)

High (60.02)

Low (5.83)

2005, ITU）

PC Bang

Background factors

Demandstimulation

policy,its

effectDemandstimulation

Demand stimulation

policy.

Socio-cultural

policy, but its effectunknown.

factors (education fever,unknown.

and Bali-bali culture).

(2) Supply-side Factors
Japan

Korea

United States

FranceUnited Kingdom

Thailand

17.5

25.2

16.6

15.6

16.0

0.97

Subscribers per 100
inhabitants(2005,

OECD, etc.）
Availability of existing[Fixed phone] available[Fixed phone] avail-[Fixed phone] avail-[Fixed phone] avail-[Fixed phone] avail-[Fixed phone] high in

networks

nationwide, [Cable TV]able nationwide,

able nationwide,

able nationwide,

able nationwide

Bangkok but low inlow,[Cable TV] high[Cable TV] high[Cable TV] low[Cable TV] low

the other areas[FTTH] installed

by NTT and electricity[Cable TV] very low

companies since 1990s
Market Competition

Fierceservice-based

competition

in

DSL

market after LLU, thenFiercefacility-based

competition,thenincrease in subscribers.

Facility-based compe-

Fiercetition between DSL andcompetition

cable

but

marketisincrease in subscribers.

oligopolistic. Service-

Facility-based competi-

basedtion in FTTH.

inactive

competition
after

is

CLECs

service-based

Service-based compe-

Facility-based

DSL

tition in DSL, mainly bycompe-

market[usingsimpletition in DSL, but

unbundledaccess]bitstream. But recently

competitionuse of unbundled lines

very active.

then

in

increase

in

other

density,

343 inhabitants/km2

demographic

and

is

not

subscribers.

increased, with growth

30 inhabitants /km2

110 inhabitants /km2

246 inhabitants /km2

120 inhabitants /km2

Prepared

Prepared

PreparedNot enoughwhen

Introduced in late 90s

Yes （ open FT’s local

Yes (but the effect is not

Not yetsubscribers

but bust of CLEC madenetwork）

clear)

service-based compete-→ fierce service-based

tion

competitionbust
Population

resale480 inhabitants /km2

of subscribers

Nearly half population

factorslivinginhigh-riseapartment buildings
Generalcompetition

Prepared

Prepared

Local loop unbundlingYes (opening NTT’s local

Not

(LLU)

network)

broadband

policyintroduced→ fierce service-based

arecompetitionin place）

increasing （ Now

inactive.

Then

relaxed and abolished.
Government

supportfor network building

Background factors

Support for optical fiber

Support for high-speedSomestate/municipal

In recent years, someSomeinstallation since 1990s

network since 1990s

governments give aid

local government built

broadband diffusion in

in

for

and opened their own

rural areas.

Unablenetworkbuteffortsfor

Support for network
rural
to

areas.
allocate

operators opposed.

networks

Commitment to set up

Government-oriented

Decentralized

Strategic initiative by

Strategic initiative by

Strategy laid out is

optical fibers by NTT

strategic initiative such

system, Lack of strategic

government

such asgovernment such as UK

notand electric companies.

as KII and Cyber Korea

initiative by government

RE/SO2007 plan (butOnline plan (but its

Human resources in

e-Japan Strategy

21

its effect is not clear)effect is not clear)government lack.

political

spectrum for WiMAX
followedup.

From the results summarized in Table 1, the following factors are considered to have contributed tothe broadband diffusion.
-prices of broadband services-

prices for dial-up connection services-

broadband content and application-

income level-

users’ capabilities-

availability of existing networks-

competition in the broadband market (both facility- and service-based competition)-

background factors including policies and regulations such as LLU, supports for networkbuilding, strategic government initiative and political systems.

4. Empirical Analysis
Using the following simultaneous equation model, we classify factors affecting broadband adoption.
BBPd = BBPs at the equilibrium.
Demand side: BBPd=BBPd(Pb, Y, Pd , AC, U)
Supply side: BBPs =BBPs (Pb, N, D, Cf, Cs)
where

BBPd:

demand for broadband access per 100 inhabitants

BBPs:

supply for broadband access per 100 inhabitants

Pb:

price for broadband access services [endogenous variable]

Y:

income level

Pd:

price for dial-up Internet access as a substitute for broadband

AC:amount of applications and content as a complement for broadband

U:ability of users

N:availability of existing networks such as conventional telephone and cable televisionD:

population desity

Cf:degree of inter-modal competition (proxy for facility-based competition)

Cs:

degree of intra-modal competition in DSL (proxy for service-based competition)

The estimation is made by the two-stage least squares method (2SLS). We conduct two empiricalanalyses: the first one deals with 94 countries around the world and the second analyzes 19 developed
countries (Japan, Korea, United States, Canada, Australia and 14 EU member countries). Sources ofdata for variables are shown in Table 2 and 3. The results are shown in Table 4 and 5.
5. Analysis on Effectiveness of Policy Measures for Competition(1) Facility-based competition (inter-modal competition)
Most inter-modal competition in OECD countries is between DSL and cable modem; there are few
broadband subscribers with new infrastructure such as optical fiber. Moreover, the degree ofinter-modal competition in the broadband market measured by the Herfindahl-Hirschman Index (HHI)
depends on the penetration rate of cable television, which is an initial condition for each country,
rather than prompted by policies and regulations to encourage competition.

Table 2

Data for Variables in Model A (World Model)

Variable

Expected Sign

Data Description

BBP

Broadband subscribers *1 per 100 inhabitants (population)*2

Pb

Monthly charge of broadband service (downstream, mostly 256-1024kbps, US dollar,
surveyed in July to September, 2005）*1

Demand Supply +?

*2YGDP per capita (US dollar)

Pd

Local call rate (3 minutes in peak hour, the most recent data available before 2004

+
+

*3

when 2004 data is not available, US dollar)
AC

Number of Internet hosts per 10,000 inhabitants*1+

U

Enrolment ratio in primary education (%)*4+N

Sum of Fixed phone lines*1 and cable television subscribers (2003;

when 2003 data+

is not available, the most recent available data before 2003 is used) *3 per 100
inhabitants (population)*2
D

Population density (population/km2)*2

+
*4

Cs

Whether competition is permitted in the DSL market (dummy variable)+

Cf

Sum of square of each subscribers share (percentage) of DSL, cable modem and-others *1 in total number of broadband subscribers
Source： *1 ITU(2005a), *2 World Bank、World Development Index, *3 ITU(2005b), *4 UNESCO. Data in 2004 unlessspecifically noted.

Table 3

Data for Variables in Model B (Developed Country Model)

Variable

Expected Sign

Data Description*1

per 100 inhabitants (population)

*2

BBP

Broadband subscribers

Pb

Monthly charge of DSL service provided by the incumbent operator (the lowest price*3

Demand Supply +?

plan in case of using 5 Giga bites. US dollar)*4Y

GDP per capita (US dollar)+

Pd

Price of dial-up service for 40 hours per month at night using discounted public+*5

network (excluding fixed rate, September 2002, US dollar）
AC
U
N

Number of Internet hosts per 10,000 inhabitants*6+

Percentage of the population that has attained tertiary education (2003)*5

Sum of Fixed phone lines and cable television subscribers (2003;*7

when 2003 data

is not available, the most recent available data before 2003 is used)inhabitants (population)

+
*5

+

per 100*2

D

Population density (population/km2)*2+

Cs

Sum of square of each subscribers share (percentage) of incumbent and-*1

non-incumbent operators in total number of DSL subscribers
Cf

Sum of square of each subscribers share (percentage) of DSL, cable modem andothers*1-

in total number of broadband subscribers

Source：*1 Japan: MIC Website, United States: FCC(2005), Canada: CRTC(2005), 14 EU countries: ECTA, Korea:
NCA(2005), Australia: ACCC(2005), *2 World Bank、 World Development Index 、 *3 OECD(2005a) *4 IMF、 *5
OECD(2003)、*6 ITU(2005a)、*7 OECD(2005b). Data in 2004 unless specifically noted.

Table 4

Estimation Results of Model A

n=94, dependent variable：lnBBP

DemandSupplyConstant

8.214(16.823)

Constant

5.470 (4.834)

lnPb-2.045 (0.738)***lnPb-0.371 (0.557)

lnY

0.947 (0.348)***lnN

1.596 (0.303)***lnPd-0.326 (1.427)

lnD

0.102 (1.101)

lnAC

0.080 (0.174)

lnCs

0.639 (0.374)*

lnU-1.906 (2.795)

lnCf-1.164 (0.476)**

Adjusted R2＝0.443(

Adjusted R2＝0.759) standard error (after White’s correction), * significant at 10%.

Table 5

Estimation Results of Model B** significant at 5%.

n=19, dependent variable：lnBBP

DemandConstant

7.608 (2.316)****** significant at 1%.

SupplyConstant

17.190 (4.678)***lnPb-1.158 (0.582)*

lnPb-0.423 (0.354)

lnY-0.478 (0.395)

lnN

0.419 (0.229)*

lnPd

0.457 (0.232)*lnD

0.050 (0.038)

lnAC-0.003 (0.108)

lnCs-0.789 (0.365)**lnU

0.634 (0.271)**

lnCf-0.932 (0.302)***2

Adjusted R ＝0.584() standard error

Adjusted R2＝0.719* significant at 10%. ** significant at 5%.

*** significant at 1%.

(2) Service-based competition (intra-modal competition)
When measuring the effect of LLU by looking at whether LLU positively increases the penetration ofbroadband access, it is found that despite the limited number of samples, LLU is effective in countries
with low cable penetration rates. However, in countries with high penetration rates of cable television,
the effect of LLU is not clear.
6. Factors Contributing to Broadband Diffusion (Summary)(i) Demand side-

prices of broadband access services-

prices of dial-up connection services as substitutes for broadband (only in developed countries)-

income level (but its effect is unknown in developed countries)-

users’ capability (significant only in developed countries)(ii) Supply side-market competition (both facility-based (or inter-modal) and service-based (or intra-modal))-availability of existing networks(iii) Background factors (on the supply side)-

existence of disruptive competitors with solid financial basis-

operators’ commitment to network building-

government’s strategies (such as setting a target broadband diffusion) and the political systems.

(iv) The degree of inter-modal competition depends on the penetration rates of cable TV, rather thanpolicies and regulations. LLU works effectively in a country where cable TV is not widespread.
7.

Policy Measures to Promote Broadbanda) Policy measures on supply side to promote competition and infrastructure building such as:-legal framework and its enforcement for promoting market competition in general-promotion of facility-based competition-

promotion of service-based competition with LLU-

support for building new network infrastructureb) Policy measures on demand side
Policy measures to encourage demand, such as financial support for broadband subscriptions and ICT
capacity-building, may be effective, but impose significant financial burdens on taxpayers and distortthe effective allocation of resources, and how much they increase the use of broadband is largely
unknown. Their cost/benefit needs to be identified before determining how much the government
should implement such measures.
c)Strategy and political systems

It is useful to draw up and carry out a national strategy for encouraging broadband such as setting
targets. Efforts to promote broadband diffusion may be hindered by political systems.
8.

Policy Measures for Broadband Diffusion in Developing Countries

The government of a developing country that is lagging behind developed countries in many
contributing factors should take the following measures:a) Building new network infrastructure
It is reasonable for a developing country, where the conventional telephone network is not highly
developed, to build an IP network, as such networks cost far less and provide more diverse services. In
particular, broadband wireless access (BWA) and WiFi are appropriate. Policy measures such as
spectrum allocation for BWA and rule-making for licensing should be taken.
b) Competition policy
A developing country should prepare an institutional framework that encourages competition, such as
liberalization and network interconnection rules. It is also important to take measures to promote theinstallation of new networks such as BWA, which boost facility-based competition. Since LLU whichhelps promote service-based competition may discourage investment in network building which is the
key for a developing country, its effects should be examined carefully.
c)Demand side policy measures

It is difficult for developing countries to push demand-side policy measures due to lack of financial
resources. But public services such as medicine and education are so important for their developmentthat measures to urge the provision of such services using broadband are significant. Not only theirown government but also international organizations and developed countries should assist suchprojects that use broadband.
9. Limitations and Issues for Further Study