metadata: authors: 0: author: Cariolle,Joël
1: author: Houngbonon,Georges Vivien
2: author: Silue,Tarna Abdoul Hamid
3: author: Strusani,Davide
count: World
docna: 0: docna: The Impact of Submarine Cables on Internet
            Access Price, and the Role of Competition and Regulation
docty: Policy Research Working Paper
abstracts: cdata!: Submarine cables enable international
            connectivity and are essential for high-speed internet
            access. This paper tests their potential to improve the
            affordability of internet access by supporting a price drop
            through cost savings or increased competition intensity. The
            empirical framework relies on a dataset that combines the
            capacity of submarine cables with price data on fixed and
            mobile internet across 150 countries over a decade. Using a
            two-way fixed effects estimator, the analysis finds that the
            expansion of submarine cables is associated with a
            statistically significant drop in the price of internet
            access, up to 14&#x2013;21 percent, depending on the
            technology, for every doubling of the capacity of submarine
            cables, and with large regional disparities. These effects
            stem from cost savings in the short run and tend to decline
            over time, concomitant with a rise in domestic telecom
            market concentration. The analysis also finds that these
            effects can be enhanced by telecom regulations, especially
            de-jure independence of the regulator, and the regulation of
            network interconnection and access, shared telecom
            infrastructure, and competition from international players
            across the broadband value chain. The main findings are
            robust to alternative estimation strategies, including an
            instrumental variable and a staggered difference in differences.
display_title: The Impact of Submarine Cables on
            Internet Access Price, and the Role of Competition and Regulation
listing_relative_url: /research/2024/07/34362367/impact-submarine-cables-internet-access-price-role-competition-regulation
topicv3: Price Controls m1326085 2107,Competition Economics m1326985 2111,Digital Economy Strategy m1327584 2345,Regulatory Impact Assessment m1503292 2645,Submarine Cable m1505647 3086
publishtoextweb_dt: 2024-07-09T00:00:00Z
dois: 10.1596/1813-9450-10840
origu: Off of Sr VP Dev Econ/Chief Econ (DECVP)
no_of_pages: 49
author_keys: 0: author_key: NA
1: author_key: 1738516
2: author_key: 2126510
3: author_key: 1594507
model_extractions: Policy Research Working Paper 10840 The Impact of Submarine Cables on Internet Access Price, and the Role of Competition and Regulation _Joël Cariolle Georges Vivien Houngbonon Tarna Silue Davide Strusani_ International Finance Corporation July 2024
Policy Research Working Paper 10840

# **Abstract**

Submarine cables enable international connectivity and are essential for high-speed internet access. This paper tests their potential to improve the affordability of internet access by supporting a price drop through cost savings or increased competition intensity. The empirical framework relies on a dataset that combines the capacity of submarine cables with price data on fixed and mobile internet across 150 countries over a decade. Using a two-way fixed effects estimator, the analysis finds that the expansion of submarine cables is associated with a statistically significant drop in the price of internet access, up to 14–21 percent, depending on the technology, for every doubling of the capacity of submarine cables, and with large regional disparities. These effects stem from cost savings in the short run and tend to decline over time, concomitant with a rise in domestic telecom market concentration. The analysis also finds that these effects can be enhanced by telecom regulations, especially de-jure independence of the regulator, and the regulation of network interconnection and access, shared telecom infrastructure, and competition from international players across the broadband value chain. The main findings are robust to alternative estimation strategies, including an instrumental variable and a staggered difference in differences.

This paper is a product of the International Finance Corporation. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at joel.cariolle@ferdi.fr, ghoungbonon@ifc.org, tsilue@ifc.org, and dstrusani@ifc.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
The Impact of Submarine Cables on Internet Access Price, and the Role of Competition and Regulation<sup>∗</sup> Joël Cariolle,<sup>†</sup> Georges Vivien Houngbonon<sup>‡</sup> ,Tarna Silue,<sup>§</sup> Davide Strusani<sup>¶</sup>

**Keywords:** Digital Economy Strategy; Submarine Cable; Price Controls; Competition Economics; Regulatory Impact Assessment.

**JEL Classification:** E31, L51, L96, O33.

> ∗This study was conducted as part of efforts from the International Finance Corporation, the private sector arm of the World Bank Group, to understand the development impact of digital infrastructure and associated investment opportunities. Earlier study drafts benefited from comments from Jonas Hjort, Denis Medvedev, Marcio Cruz, Maty Konte, Mariana Lopez, Florian Moelders, and Samuel Edet. The authors thank Stephane Straub, the World Bank’s Infrastructure Chief Economist for comments and suggestions. The authors are also grateful to Lozanova Youlia, Senior Analyst of Policy and Regulation at the International Telecommunications Union for kindly providing access to the detailed regulation data.

> †Research Officer, FERDI, and University Clermont Auvergne, CNRS, IRD, CERDI, Clermont-Ferrand, France.joel.cariolle@ferdi.fr

> ‡Economist, IFC:ghoungbonon@ifc.org and Senior Fellow at the GWU Competition and Innovation Lab, corresponding author

> §Economist, IFC:tsilue@ifc.org

> ¶Principal Economist, IFC:dstrusani@ifc.org
# **1 Introduction**

Submarine cables (SMCs) are part of a global network of fiber optic cables that run through oceans to connect countries,<sup>1</sup> and therefore individuals and businesses, to the Internet. They form a crucial component of Internet access and are often considered the ‘first mile’ as all telecom operators need access to submarine cables to connect their customers to the global Internet. On average, 15 to 20 new submarine cables have been deployed across the globe annually over the past 30 years and a similar trend is expected to continue over the next decade.<sup>2</sup> Each new submarine cable typically requires several million dollars of investment and often requires additional investments in terrestrial digital infrastructure such as fiber optic cables, towers, and data centers, as well as digital innovation, entrepreneurship, and skills to benefit end-users. As such, they can support market and broader economic development in the landing countries and beyond.

Studies such as Hjort and Poulsen (2019), Simione and Li (2021), Houngbonon et al. (2022), Imbruno et al. (2022), and Cariolle and da Piedade (2023) have investigated the economy wide effects of SMCs, especially their impact on economic growth, employment, innovation, entrepreneurship, and trade. Other studies, such as Cariolle (2021) investigated the market outcomes of SMCs but focused on access to connectivity. Empirical evidence on the market outcomes of SMCs, especially the impact on price, and the role of competition and regulation is still not available. Yet, such evidence remains crucial to understanding the channels through which SMCs affect access to connectivity and generate the economy wide effects quantified in previous studies.

Anecdotal evidence abounds on how Internet access prices evolved following the arrival of major submarine cables (Appendix A). For instance, Nigeria experienced the arrival of five SMCs between 2010 and 2015.<sup>3</sup> These new SMCs have accelerated the growth of international Internet bandwidth used in the country, from an annual rate of 48 percent between 2010 and 2014 to 70 percent between 2015 and 2020.<sup>4</sup> Such an expansion in bandwidth was accompanied by a 5 percentage point drop in the price of mobile broadband over the same period.<sup>5</sup> Cameroon also experienced the arrival of three major SMCs during the same period, among the five which arrived in Nigeria: ACE, WACS and NCSCS. These arrivals were also associated with an ex-

> 1Some submarine cables may have some terrestrial segments.

> 2Telegeography, 2022.

> 3Glo-1 and MainOne in 2010; Africa Coast to Europe (ACE) and West Africa Cable System (WACS) in 2012, and the Nigeria Cameroon Submarine Cable System (NCSCS) in 2015.

> 4Based on bandwidth data from Telegeography.

> 5Price of 2GB of mobile broadband data in percentage of monthly income per capita - based on data from the ITU.

2
pansion of international bandwidth and a similar drop in mobile broadband price. In Tunisia, the arrival of a submarine cable in 2014 (Didon) was associated with a percentage drop in the price of mobile broadband.

Telecom sector research and industrial organization theories suggest two main channels through which SMCs can affect Internet access prices in the short run. First, the deployment of SMCs can result in cost savings on international connectivity for telecom operators through (i) economies of scale brought by increased international Internet bandwidth; (ii) a drop in data (re)routing cost supported by greater connectedness enabled by new SMCs; and (iii) a drop in network maintenance cost due to stronger resilience induced by the duplication of SMCs routes. Depending on the intensity of competition along the local broadband (BB) value chain, part of these cost savings can be passed onto end-users in terms of reduced price. Second, deploying SMCs can reduce barriers to entry into broadband markets, especially when the new infrastructure is shared under an open and non-discriminatory basis among retail broadband operators. In both cases, regulation can enhance these effects. These effects pertain to the short term, i.e., assuming no change in the availability and quality of connectivity for end-users. In the long run, changes in availability and quality of connectivity stemming from investment in middle and last-mile infrastructure may exert upward pressure on price.

In this paper, we assembled a dataset on SMCs to investigate their impact on price and the role of competition and regulation, controlling for several confounding factors, including the availability and quality of connectivity and market size. In particular, we sought to assess the impact of SMCs on price; how it evolves; regional heterogeneity; the biggest drivers of the impact, especially the relative influence of cost savings versus competition; and how this depends on the regulatory environment.

Our dataset covers more than 150 countries across all regions over 12 years (2008-2020) and includes detailed information on the capacity of SMCs, measured by the amount of international Internet bandwidth. We complement this information with data on the price of the typical fixed and mobile broadband Internet package, as well as market concentration indexes and 50 indicators measuring various aspects of ICT regulation. We employ a two-way fixed effects estimator, an instrumental variables estimator, as well as a staggered difference-in-differences estimation strategy.

Our estimates lend support to the hypothesis that SMCs deployment results in a drop in the price of Internet access: doubling the international bandwidth leads to up to a 14% drop in fixed BB price, and up to 21 % drop in the mobile BB price. The impact on fixed broadband 3
price increases to 14%, 3 years post-expansion, before stabilizing around 7%-8% thereafter. On the contrary, the impact on mobile BB price drops to around 11%, 2 years post-expansion, and continues dropping towards a non-significant impact 5 years post-expansion. Except for Europe and the Middle East regions, the impact of SMCs on broadband prices was negative and statistically significant, with the lowest impact estimated for the African region, followed by Asia and Latin America where broadband markets tend to experience their biggest drop in price with the arrival of SMCs.

Our findings suggest that cost savings are the main drivers of the price effects in the short term, with some indicative role of competition in the medium term. They also suggest that regulation can be a powerful tool to increase the pass-through rate of cost savings and limit further concentration of retail broadband markets. In particular, an independent regulator, with a mandate to enforce competition through (i) reduced barriers to entry for domestic and foreign operators, (ii) shared infrastructure, including radio spectrum, (iii) regulation of interconnection and market dominance, as well as (iv) universal service provisions, and (v) consumer protection can all contribute to boost the impact of SMCs on price and alleviate its effects on market concentration.

This paper relates to the literature on digital development and the industrial organization of the telecom sector. Studies on digital development have investigated the economy wide effects of digital infrastructure, especially on GDP, jobs, productivity, innovation, entrepreneurship, and trade, but did not analyze the market outcomes of this infrastructure. A notable study is Hjort and Poulsen (2019) which exploits the gradual arrival of SMCs in Africa between 2000 and 2010 and found that changes in access to high-speed Internet post arrival of the cables led to job creation across all levels of education. A recent study conducted by Simione and Li (2021) exploited the arrival of SMCs in Africa after 2009 and found that a percentage point (pp) increase in Internet penetration induced a 0.37 pp increase in real per capita GDP growth, with increased labor productivity in the utilities, trade, and transportation sectors. These findings were supported by country case studies in Sub-Saharan Africa (SSA) (O’Connor and Anderson (2020)) which found a positive impact on GDP per capita, and an increased likelihood of being employed in fiber-connected areas. SMC connectivity can also affect trade in developing countries as suggested by findings from Imbruno et al. (2022) and Cariolle and da Piedade (2023).

Studies on the industrial organization of the telecom sector have looked, among others, at the drivers of price, especially the role of competition and regulation, but did not consider these effects in the context of infrastructure deployment. To our knowledge, the market effects of 4
SMCs have until now been confined to the impact on Internet penetration and delimited to the SSA context. Cariolle (2021) considered the deployment of two SMCs<sup>6</sup> along the Eastern and Southern African coasts in 2009-2010 as quasi-natural experiments and found that they resulted in a 3 to 5 percentage points increase in internet penetration in recipient countries. Several studies have also investigated drivers of the digital divide, especially in SSA, and identified digital infrastructure like SMCs as an important determinant (Schumann and Kende (2013); AkueKpakpo (2013); Bates (2014); Cariolle (2021)), and a regulatory and competition environment that until recently was not conducive to Internet affordability and quality (Wentrup et al. (2016); Gallegos et al. (2020)).

This study complements these two strands of the literature by connecting infrastructure investment with market outcomes, taking into consideration the role of competition and regulation. The remaining of the paper is organized as follows: Section 2 presents the conceptual framework along with our testable hypotheses; Section 3 presents the data and descriptive statistics, Section 4 presents the empirical framework; Section 5 reports the main results on the impact of SMCs on price, including regional effects; Section 6 discusses the role of competition and regulation; Section 7 presents some robustness checks; and Section 8 concludes.

# **2 Conceptual framework**

## **2.1 Understanding SMCs and their impact on Internet access price**

Determinants of Internet access prices, i.e., the price charged to individuals and businesses seeking to connect to the Internet, can be grouped into (i) supply-side factors related to the cost of international and domestic connectivity, (ii) demand-side factors related to the size of the telecommunication market, and (iii) institutional factors related to competition, which determine margin over cost, and regulations. This study focuses on supply-side factors, in relation to SMCs which primarily affect the cost of international connectivity,<sup>7</sup> taking into consideration demandside and institutional factors.

The channels through which SMCs affect Internet access prices reflect the structure of Internet infrastructure. This structure can be represented by three segments, each supported by a variety of technologies, as depicted in Figure 1: a ‘first-mile’ that involves international connectivity (i.e., connecting countries to the Internet), a ‘middle-mile’ which involves domestic

> 6EASSy and SEACOM.

> 7Other international connectivity infrastructure such satellites could be considered, but they carry less than 5 percent of international Internet traffic according to D’Andrea and Limodio (2019), based on the testimony of D. Burnett before the Senate Foreign Relations Committee on the United Nations Law of the Sea Convention.

5
<!-- Start of picture text --> First mile Middle mile<br>« SMC * Backbone (SMC<br>* SatallSatellitesea eae landingIXPs, dataie stations,centers,' Last=milFy<br>ae yee Inter-cities, high- + Cell sites / base Internet services<br>galeways Capacity fibers links station sites<br>= Remonal IXPs / data + Backhaul (central * Wirelines.<br>centers switching locations,<br>« Cross-border high mobile base stations,<br><!-- End of picture text -->
avert disruptions in international connectivity that would require maintenance by network operators.

There are two ways in which these cost reductions can affect Internet access prices:

- **Direct pass-through** , i.e., telecom operators would pass through part of the cost savings to end-users. However, the pass-through rate would depend on the regulation of bottleneck infrastructure in the middle and last mile, and the intensity of competition in the market for Internet access services. Middle and last-mile Internet infrastructure typically entail bottleneck infrastructure called backbone and backhaul or metro network that are owned by a single operator which may also be active in the retail market and, as a result, have an incentive to discriminate against competitors in the retail markets. Regulations on infrastructure sharing are crucial to enable open access to this infrastructure on a nondiscriminatory basis.

- **Indirect pass-through** via increased competition in the retail connectivity market as reduced cost of access to international connectivity lowers barriers to entry for retail network operators,<sup>10</sup> thereby inducing a price drop. However, regulation is here again key to support such an outcome. For instance, a new SMC which is exclusively used by a vertically integrated dominant telecom operator would not reduce the barrier to entry. Regulation can mandate access to the SMC and, therefore, enable the expansion of competitors.

In the medium term, the arrival of SMCs would result in improved quality of Internet access by inducing investment in middle and last-mile infrastructure. For instance, in a competitive environment, network operators would upgrade the capacity of middle and last-mile infrastructure such as data centers, towers, and domestic fiber optic networks to respond to the demand for Internet traffic induced by the short-term drop in price. These investments can improve internet quality and availability and exert upward pressure on prices in the medium term.

In sum, SMCs are expected to exert a direct downward pressure on broadband price by reducing the costs of internet provision, and an indirect one by fostering competition. In the longer run, an upward price pressure, reflecting a greater internet quality and resulting from greater investment and innovation processes, might be exerted and also promoted through greater competition. While the former mechanism is termed a “cost-reduction effect”, the latter one is termed the “quality effect” of SMC rollout. These mechanisms should be affected by regula-

> 10Entry refers to the establishment of a new network operator serving end-users, or the expansion of an existing operator in new geographical markets (cities) or new product lines.

7
<!-- Start of picture text --> Direct pass-through<br>SMC = Cost savings ——~> Reduced Price<br>+ Economies of scale<br>. Savings on re(routing) cost<br>. Saving on maintenance cost<br>+ indirect pass-through<br>Competition intensity<br><!-- End of picture text -->
# **3 Data and descriptive statistics**

We built a country-level panel dataset covering 150 countries for which price data was available over the following period: 2008-2021 for fixed broadband, and 2012-2021 for mobile broadband. Our dataset includes data on price, SMCs, competition, and regulation, as well as several variables used as controls in the econometric modeling. Definitions and sources of variables are described in Table 1. Summary statistics are reported in Table 2, while correlation matrices are presented in Tables 3 and 4 in the Appendix.

## **3.1 Price data**

Telecom markets host a variety of packages with different levels of usage allowance and attributes, and this can make the measurement of price challenging in this sector. Several approaches are considered in the literature to address this challenge. Studies like Nicolle et al. (2018) use a hedonic price model, whereby price is estimated as a function of the attributes of packages. As such, a focus can be set on the price of a particular attribute, for instance, data allowance or quality, and be used in the analysis. Such modeling requires comprehensive data on all packages offered by operators and the results can be dependent on the functional form of the model. Other studies like Genakos et al. (2018) rely on the price of a particular basket of usage. As part of this approach, baskets of usage are defined, and the price of the least expensive offer is tracked for each basket. In this paper, we use the basket approach which does not require the availability of comprehensive data on packages – a task that would have been challenging to complete for a study that involves more than 150 countries/markets.

Interestingly, the ITU has defined several baskets of broadband packages and tracked their price since 2008.<sup>11</sup> We focused on two baskets that are the most representative of recent trends in data usage: (i) a basket of fixed broadband packages enabling at least 5 Gigabytes of data usage per month; and (ii) a basket of mobile broadband packages enabling at least 2 Gigabytes of data usage per month.<sup>12</sup> Figure 3 below reports the trends in fixed and mobile broadband prices in our dataset, with a faster drop in prices in countries starting from a high level.

> 11https://www.itu.int/en/ITU-D/Statistics/Dashboards/Pages/IPB.aspx.

> 12Data from Telegeography suggests an average monthly data usage per capita in developing countries rising from 9 GB in 2017 to 23 GB in 2020 on fixed broadband; and from 1.4 GB in 2017 to 4.2 GB in 2020 on mobile broadband. Note that ITU’s price basket has evolved over time to reflect growing data usage by the average consumer. Two changes occurred during the period we considered in this study: one in 2017 when the allowance of the fixed broadband basket increased from 1 GB to 5 GB, and the allowance of the mobile broadband basket increased from 1 GB to 1.5 GB; and in 2020 when the allowance of the mobile broadband basket increased to 2 GB.

9
<!-- Start of picture text --> Fixed Broadband Mobile Broadband<br>rl<br>& =<br>}z<br>33<br>& ‘a? . hg a<br>:c=] L Soa | 3 7<br>& aad 2 re .., . z<br>a<br>: , a a * * t = .<br>ml a “um P ‘<br>® . * - | . .<br>Hy = i "a = *<br>§®<br>=<br>=3<br>z a<br>Qo 20 40 60 a0 100 oO 2 40 et a) 100<br>Price in % of monthly GMI per capita, 2073 Price in % of monthly GM por capiia, 2073<br><!-- End of picture text -->
<!-- Start of picture text --> 2 <i wo Sea — :<br>Per User in 2021, in kbit/s<br>BBHl1) 1,000t0500to 15010 100to999499149 1,999 we<br>5010.99<50= zPe a<br><!-- End of picture text -->
tition intensity across market segments).<sup>14</sup> We used the aggregate score but also investigated the contribution of each regulatory sub-index and indicator in more detail.

# **3.3 Control variables**

Control variables are grouped into two broad categories: variables related to the quality of connectivity and those related to the market size.

## **3.3.1 Quality and availability of connectivity**

We measure the quality of connectivity by the amount of middle and last-mile infrastructure using the number of Internet exchange points (IXPs) which are crucial for the storage and processing of digital data across various networks. Availability of connectivity is measured by the following indicators:

- The number of fixed telephony subscriptions per inhabitant, reflecting the potential availability of fixed broadband which generally rely on or follow existing fixed telephony networks. That variable serves as a control when investigating the price of the fixed BB.

- Percentage of population covered by a mobile broadband network (3G or above).

## **3.3.2 Market size variables**

Potential market size is proxied by several indicators, including:

- Population, expressed in logarithm.

- The average income per inhabitant, proxied by the logarithm of GDP per capita.

- Electricity access, proxied by the share of the population with access to electricity.

# **3.4 Descriptive statistics**

A simple cross-country correlation between changes in international Internet bandwidth and Internet prices is plotted in Figure 5. It suggests that countries with a fast increase in submarine cable capacity experience a fast drop in both fixed and mobile broadband prices.

> 14See the Methodology note of the ICT regulatory tracker: https://app.gen5.digital/tracker/about.

12
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financial crisis. _εi,t_ is an error term. Driscoll-Kraay standard errors are computed, correcting for heteroscedasticity, contemporaneous spatial (cross-country) correlation, and autocorrelated disturbances.

## **4.2 Causal identification strategy**

Our causal identification strategy rests on incidental changes in international connectivity due to the architecture of SMCs. Indeed, SMCs typically connect two or more countries following a particular route. The decision to follow a route is generally made by an international company (e.g., a global digital platform like Google or Meta/Facebook) or a consortium of telecom operators. As such, the route followed by an SMC is unrelated to the performance of a particular country. Further, countries along an SMC route can experience increased capacity of international connectivity although they do not host a landing station from the SMC. Such an indirect benefit results from terrestrial cross-border fiber optic cables that support a routing of traffic through a country that is connected with an SMC.

We also control for market supply and demand side factors in addition to country and year fixed effects to limit omitted variable bias. Indeed, the country-fixed effects control for unobserved supply and demand side factors that are country-specific, especially given that price is measured at the market level and not at the level of a particular operator. The year-fixed effects are assumed common across countries and are expected to capture any unobserved technological changes (e.g., transition from 2G to 3G or 4G; or transition from cooper to fiber).

# **5 Main results: Impact of international connectivity on Internet access price**

Across estimations, the general reduced-form estimation framework set in equation (2) is calibrated to address the various research questions of this study. First, the analysis covers the impact of increased capacity of international connectivity on price at the global scale. Second, we highlight regional heterogeneity of the effects of international connectivity on fixed and mobile broadband prices.

14
# **5.1 General price effects of SMCs**

We estimated the following two-way fixed effects (TWFE) model, using the international Internet bandwidth (in log) as the main variable of interest: Where _Yi,t_ is the logarithm of fixed or mobile BB prices. _CAPi,t_ denotes the capacity of international connectivity. We considered the dynamic or medium-term effects by introducing the lagged value of capacity into equation (3), i.e., _CAPit−_ 1, _CAPit−_ 2 , _CAPit−_ 3, _CAPit−_ 4 or _CAPit−_ 5.

Results are reported in Tables 5 and 6 in the Appendix and summarized in Figure 6 below. They suggest that increased international connectivity capacity is associated with a drop in Internet prices: doubling the international bandwidth leads to up to 14% drop in fixed BB price, and up to 21% drop in the mobile BB price.

The evolution of these impacts differs by technology. The price effects of international connectivity amplify with time for fixed BB, and attenuate with time for mobile BB. Doubling the capacity of international connectivity in a given year generates an instantaneous drop in price of 6.2% for fixed BB and 21% for mobile BB. However, the impact on fixed broadband price increases to 14% 3 years post-expansion, before stabilizing around 7%-8% thereafter. On the contrary, the impact on mobile BB price drops to around 11%, 2 years post-expansion, and continues dropping towards a non-significant impact 5 years post-expansion.

These differences can be explained by two factors: the cost of last-mile connectivity which is crucial for the pass-through of wholesale cost savings, and the dynamic effects discussed in Section 2. Fixed BB networks provide dedicated Internet access to end-users, whereas mobile BB networks provide shared access to the Internet. As such, the cost of last-mile connectivity is higher for fixed BB Internet than for mobile BB Internet. It, therefore, takes more time for the wholesale cost savings to be passed on to end-users of fixed BB Internet than those of mobile BB Internet. Further, the reversal in impact – which starts early on for mobile BB and later for fixed BB – reflects quality improvement that is necessary in the medium term to keep up with the demand for connectivity.

Few additional findings can be derived from estimates of the coefficients of the control variables (Tables 5 and 6 in Appendix). The fixed broadband price is affected by access to electricity as well as by the availability and capacity of middle and last-mile digital infrastructure. In par15
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<!-- Start of picture text --> Fixed broadband price Mobile broadband price<br>z2a; g.x<br>HiZo 32<br>mi Ve<br>r=aa ar=><br>cc) a<br>‘ ow<br>=to = : . !<br>+<br>EUR AFR SAR LAC MDE MDE EUR AFR SAR LAG<br>Region Region<br><!-- End of picture text -->
<!-- Start of picture text --> Fixed broadband HHI Mobile broadband HHI<br>88<br>8<br>eR z<br>go 3°<br>= =<br>°o<br>b iJ<br>3 9PE<br>to La 2 3 4 bts) to 1 {2 t3 4 ts<br>Time since expansion Time since expansion<br><!-- End of picture text -->
concentration associated with international connectivity. This approach recognizes that some regulations may incentivize greater pass-through of wholesale cost savings or support open and non-discriminatory access to international connectivity, while others may have the reverse effects.

We test these hypotheses by estimating the below econometric model (5) which includes an interaction term between the change in each of the 50 regulatory indicators and international Internet bandwidth. Table 12 in the Appendix presents the list of regulatory indicators. We focus on regulatory change over the entire period covered by our sample (2008-2020 for fixed BB, and 2012-2020 for mobile BB), instead of the level, to identify how the impact of international connectivity varies across countries depending on the intensity of regulatory reforms over that period. This choice also reflects the discrete nature of the regulatory indicators – taking the values 0, 1, or 2 depending on the effectiveness of the target regulatory areas measured by the indicator.

Over the period covered by our dataset, we derived the average change in each regulatory indicator, denoted by _R_<sup> ̄</sup> _i_<sup>_j_,i.e.,theaveragechangeinregulatoryindicator</sup><sup>_j_inthecountry</sup><sup>_i_.</sup> This calculation was done for a set of relevant indicators for each type of broadband technology (fixed or mobile). For instance, regulation of radio spectrum does not apply to fixed BB; and likewise, licensing to Internet service providers does not apply to mobile BB.

We therefore estimate the following equation: The variable _Yi,t_ can be the price of fixed or mobile BB, or the HHI in the fixed or mobile market. Equation (5) was estimated at the time of the biggest impact, i.e., instantaneous effects on price, 3 years post-expansion for mobile BB and 4 years post-expansion for fixed BB. The results are reported in Tables 13 to 16 in the Appendix.

The independence of the regulator, its mandates, and its provision to enforce competition across segments of the broadband value chain are all crucial to boosting the impact of international connectivity on prices both for fixed and mobile BB. However, attenuating the impact of international connectivity on market concentration requires more regulatory changes beyond those that support price effects. Stronger independence of the regulator, control of market dominance, and infrastructure sharing – including spectrum – are additional regulatory reforms needed to lessen the impact of international connectivity on market concentration.

19
More specifically, the econometric estimates suggest the following regulatory boosters:

- **Fixed BB price:** competition in domestic and international fixed BB markets, including participation of foreign companies in these markets; autonomy in decision-making by the regulator in addition to public consultations before decisions and dispute resolution mechanisms; the regulator has a mandate on licensing and interconnection rates and price regulation.

- Status of the incumbent fixed line operator, license exemption, as well as the degree of accountability of the regulator and the implementation of local loop unbundling boost the impact of international connectivity on price, albeit with limited statistical precision.

- **Fixed BB HHI:** Consistent with the regulatory boosters identified for fixed BB price effects. However, these boosters are complemented by additional indicators on regulatory independence (funding diversity and a separate entity in charge of telecom regulation) and mandate, especially on quality of service, and criteria to regulate dominant operators.

- **Mobile BB price:** competition driven by the participation of foreign companies in the digital infrastructure market segment, mandated site colocation and sharing, allowing users to use voice over IP, as well as a regulatory mandate on interconnection rates and price, universal services, and consumer protection, in addition to dispute resolution mechanism and the availability of a national broadband plan.

- Competition in middle mile broadband infrastructure like leased lines, as well as a mandate on licensing also contribute to boosting the impact of international connectivity on mobile BB price, albeit with limited statistical precision.

- **Mobile BB HHI:** the boosters are consistent with those on price effects, in addition to regulation of dominant players, foreign participation in value-added services, regulatory mandate on spectrum and the ability to trade spectrum, mobile portability, and further independence of the regulator.

# **7 Robustness Checks**

## **7.1 Potential endogeneity of SMC expansion**

Despite the identification strategy presented above, the expansion of SMCs may still be endogenous as telecom operators in less competitive markets may purposely expand the capacity of 20
international connectivity to reduce costs. To test the sensitivity of our estimates to such a potential reverse causality, we employed an instrumental variable approach.

Our identification strategy consists of taking parts of the variation in a country’s total bandwidth that stem from changes in the bandwidth of countries they are connected to. For landlocked countries, we took the bandwidth of the coastal country hosting the closest SMC to their capital city. We have tested numerous definitions and measurements of such an instrumental variable and determined that being connected to a country in Sub-Saharan Africa throughout this study (2008-2020) is a strong determinant of changes in bandwidth in any other country in the world (see specification (1) in Table 17).

The findings presented in Table 17 lend support to our main results: increased SMC capacity is associated with a drop in broadband Internet price, for both fixed and mobile technologies.

# **7.2 Addressing the heterogenous and dynamic effects of SMC arrivals**

The TWFE estimation strategy applied above faces two important inference challenges. The first challenge is related to the existence of possible heterogenous treatment effects which, if not considered, may be biased, and may even lead to produce estimates of opposite sign of the true Average Treatment on Treated (ATT). The second challenge is related to the existence of dynamic treatment effects, which reinforces the bias arising from the static framework, due to contamination effect of early treated groups on lately treated groups (De Chaisemartin and d’Haultfoeuille (2020); Baker et al. (2022); Liu et al. (2022)).<sup>15</sup> A third challenge is related to the nature of our baseline interest variable, the international bandwidth capacity, which is continuous and non-staggered, and therefore not appropriate for available Diff-in-Diff (DiD) frameworks designed to deal with the first two estimation challenges. We attempt to address these three challenges in the following sub-sections.

# **7.3 SMC arrival and BB prices**

We replaced our interest variable, i.e., the international bandwidth capacity, with the cumulative number of SMCs that landed in a given country over the estimation period.<sup>16</sup> This

> 15In a TWFE setting, the treatment effect is a weighted sum of the average treatment effect on different treated groups g (early treated, later treated), at different points of time t. The weights for some groups are not related to the size of the group, which means that some groups are overweighed, and others are underweighted. More importantly, some weights may be negative, which may lead to type 1 and 2 errors, and this problem increases as the group has been treated for a long time, and many groups are treated in period t. Therefore, the problem stems mainly from the inclusion in the control group of units already treated as controls, which leads to the "forbidden comparison" (Goodman-Bacon (2021)).

> 16We prefer using the cumulative variation in the number of SMCs to the raw number SMCs, or the simple difference from one year to another. The raw number is a stock variable that takes many values, from 0 to 64 with very few observations or countries for high values the SMC number variable, which challenges the analysis by reducing the number of counterfactuals (switchers-in and- out) for these values. On the other hand, using a

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variable consists in transforming the raw number of SMCs in (strictly increasing) cumulative difference, starting from 0 at the beginning of the estimation period to _K_ at the end when the SMC number increased by _K_ units over the estimation period. While this variable does not comprehensively reflect a country’ international broadband capacity, it has the merit of better identifying the treatment since SMCs deployment in recipient countries is a critical source of increased international connectivity, and since this variable is of staggered and ordered nature.

Then, we address the issues of heterogenous and dynamic treatment effects by implementing the extended _DiD_ estimator with multiple groups ( _DIDM_ ), periods and non-binary treatments of de Chaisemartin and d’Haultfoeuille (De Chaisemartin and d’Haultfoeuille (2022); De Chaisemartin and d’Haultfoeuille (2023); de Chaisemartin et al. (2022)).<sup>17</sup> We then estimate the following model, considering the effect of the cumulative difference in SMCs ( _CDit_ ) on the logarithm of fixed or mobile broadband prices ( _Yi,t_ ), controlling for the lagged number of SMCs ( _SMC_ Lit_ ), and additional control variables ( _Xit_<sup>_′_):</sup> In addition to the baseline control variables (including the regulatory quality), we added the lagged number of SMCs to account for nonlinearities in the effect of SMC variation on BB price depending on their number, as there may be for instance return to scale in their deployment (cost-saving hypothesis).<sup>18</sup> Last, since the mobile broadband price variable has a shorter time dimension, we had no option but to balance the sample between treated and untreated observation units by binning together the highest values of the variable, associated with few observations (using the _recat_ treatment_ option, as recommended by CDH), and to reduce the number of lags and placebos when using this price variable. We used a binning threshold of 15, based on the variable’s treatment distribution represented on Figure 14 in the Appendix.

_DIDM_ estimates of ( _δ_<sup>ˆ</sup> 1 ) are reported in Figure 9 below and detailed in Tables 18 to 20 in the Appendix. Graph (A) on Figure 9 reports estimates using the fixed BB variable and points to a 1% significant negative and dynamic effect of SMC arrivals, starting one year after the treatment onset, persisting and intensifying afterward. However, these estimates point to simple first-differenced, and therefore non-staggered, SMC variable would improperly reflect the staggered arrival of cables.

> 17Using the _did_  multiplegt_ Stata package. Other methodologies like Butts (2021) deal with spatial spillovers in difference-in-differences.

> 18We additionally control, in the following subsection, for market concentration to test the competition and regulation channels.

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<!-- Start of picture text --> (A) FIXED BB PRICES (B) FIXED BB PRICES, WITH REG. TRENDS<br>P| Pee<br>,<br>;ae SEE<br>A 0 5 46 a 5<br>time_to_treatment time_to_treatment<br>(C) MOBILE BB PRICES<br>pS<br>4[Ee tester 2wea time_;es t o_treeatmentana eet ope sb0inentnen2 tea4<br><!-- End of picture text -->
<!-- Start of picture text --> (A) FIXED BB MARKET, ALL CONTROLS (B) MOBILE BB MARKET, ALL CONTROLS<br>DID, from last period before treatment changes (t=-1) to t<br>g8<br>8<br>g<br>8<br>wo<br>88<br>3 8<br>72<br>54 a 2 | a 1 2 a 4 5 5 “4 3 “2 A a 1 2 a 4 5<br>Relative time to period where treatment first changes (t=0) Relative time to period where treatment first changes (t=0)<br><!-- End of picture text -->
# **8 Conclusion**

This paper has sought to investigate how SMCs affect telecom market outcomes, especially the price of Internet access. Our analysis supports the hypothesis that the arrival of SMCs is associated with a drop in the price of fixed and mobile Internet access. These price effects decline with the available capacity of international connectivity and tend to dwindle over time, especially for mobile BB. They are more concentrated in developing countries, with no significant impact found in Europe or the Middle East regions. The African region has more limited SMCs capacity than other regions and also carries the smallest impact of SMCs on Internet access prices.

Our findings suggest that cost savings are the main drivers of the price effects in the short term, with some indicative role of competition and quality improvement in the medium term. They also suggest that regulation can be a powerful tool to increase the pass-through rate of cost savings and limit further concentration of retail broadband markets. In particular, an independent regulator, with a mandate to enforce competition through (i) reduced barriers to entry for domestic and foreign operators, (ii) shared infrastructure, including radio spectrum, (iii) regulation of interconnection and market dominance, as well as (iv) universal service provisions, and (v) consumer protection can contribute to boost the impact of SMCs on price and alleviate its effects on market concentration.

This study has focused on the impact of SMCs on nationwide Internet access prices. Future studies could explore the impact of SMCs on sub-national prices, especially those of fixed broadband Internet, as well as wholesale prices. Further, telecom regulation was deemed exogenous in this study. Future work could endogenize regulations and investigate the impact of SMCs on telecom regulatory reforms.

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