Facilities to Service Based Competition, Not Service to Facilities Based, for Broadband Penetration and Investment: A Comparative Study between the United States and South Korea

The growth of broadband penetration has been a worldwide concern. Because broadband has considerable spillover effects on our economy and society, many governments are striving to achieve high broadband diffusion and investment. As a “required infrastructure enabler” (OECD, 2008b), broadband enhances productivity, expands new realms of businesses, and creates innovation and globalization. It is also related with efficacy of democracy by widening the digital divide and generating a new participation gap across social strata (Hargittai & Walejko, 2008). Considering all of these socioeconomic implications, broadband is an important issue which calls for more empirical research.In order to increase broadband penetration and investment, it is necessary to have competition among broadband providers. However, characterized by network economy, the broadband industry is dominated by a few incumbents who enjoy high entry barriers, built up with strong economies of scale and technological externality. Since it is difficult by nature for competition to take place in network industry, many governments have stepped in to promote competition by facilities-based or service-based entry1 in broadband industry. Service-based entry policy is adopted by most countries, though facilities-based competition is regarded as the most desirable mode of competition, because the former is assumed to facilitate entry and foster competition within a relatively short period of time through leasing incumbents‟ networks compared to the latter. Contrary to assumptions, however, previous studies have found mixed research results about the effect of service-based competition on broadband diffusion. By questioning inconsistencies in previous results, the present research attempts to find how broadband policy affects broadband penetration.Along with broadband diffusion, investment needs to be considered as well. The reason why both aspects are discussed together is that the policy to achieve either one can have negative effect on the other. Against the logic of service-based competition which assumes that open access to incumbents‟ networks facilitates broadband penetration, opposing theory raises that service-based competition undermines industry‟s incentive to invest in facilities, which deters having upgraded, high-speed broadband services. Since there is trade-off between the two competing theories, policies which promote only one side, i.e. penetration or investment, are crippled to achieve broadband service with “high capacity at low price to more of the population” (Berkman, 2010). Therefore, in addition to broadband penetration, the present research asks a question of how broadband policy shapes investment in the market.Besides policy, there are various factors which affect broadband penetration and investment such as geography, population density, income, and education. These given, non-policy variables were found to explain around 75 to 85 percent of the performance of broadband industry (Berkman, 2010), but the present research concentrates on the remaining 15 to 25 percent which might be determined by policy factors. Depending on the policy, some countries might show better or worse outcome than expected from given factors. Since this study is not to find what variables affect broadband outcome, but to find which policy factors contribute to attaining the goal of high penetration and investment, the focus is on policy, admitting the impact of non-policy factors on broadband deployment. Additionally, policy factors in this research are sided on the supply of broadband, not the demand. Policies to promote demand through education or free access to computers or Internet are out of scope of this study. This study indirectly discusses demand since it is influenced by price and quality (Berkman, 2010) which are mainly decided by the supply side. The main concentration of the present study is policy factors related to the supply of broadband.Within the pre-determined scope of this research, case studies have been chosen as the methodology in order to have differentiated and profound understanding of broadband access by country. Selected cases are the United States and South Korea both of which experienced facilities and service-based competition. Based on a deeper analysis of each country, this study expects to find how the market structure shaped by broadband policies has affected the performance of the broadband industry.This research starts in chapter II with a discussion of the importance of broadband, as well as the necessity for government intervention to increase competition in the broadband market. Chapter III has a literature review on broadband policy in the wholesale market, and chapter IV suggests research questions. Chapter V explains why the case study method is chosen and why the two countries are selected as cases. Before dealing with the research questions, institutional differences between the U.S. and Korea are discussed in chapter VI, since policies are the product of institutions. Then, case studies and comparisons of the two countries are developed in chapter VII, followed by discussion and conclusion in chapters VIII and IX, respectively.