How Big is the Broadband Bonus?

Over the past few years, nearly every developed country has formulated and begun to implement a universal broadband plan in response to long-hyped claims that investments in broadband produce outsized growth in GDP. The United States is no exception. Most recently, rural broadband subsidies were included in the American Recovery and Reinvestment Act.

But how much can countries actually expect to gain from broadband? In a 2011 Telecommunications Policy article, “The Broadband Bonus: Estimating broadband Internet’s economic value”, Shane Greenstein and Ryan McDevitt argue that claims about the benefits of broadband access are overstated.

The authors use data from the first wave of broadband adoption between 1999 and 2006 to measure GDP growth attributable to broadband, as well as how much consumer surplus broadband created for household users. They found that the use of broadband in U.S. households accounted for $20-22 billion of new revenue in 2006, of which $8.3-10.6 billion was additional revenue beyond what dial-up would have generated. Another $4.8-6.7 billion of the revenue was consumer surplus, the difference between how consumers value broadband and what they actually pay for it. These findings are a full order of magnitude lower than prior estimates. While these results do not imply that broadband has no impact on the economy, they do suggest that its contribution may be much lower than previously believed.

Greenstein and McDevitt attribute this disparity to differences in methodology. In contrast to prior studies, they calibrate their conclusions against actual historical data and account for the counterfactual. However, the authors acknowledge that their calculations have their own shortcomings. In limiting their study to households, the authors do not address business access to broadband or the impact of broadband on worker productivity. In addition, they note that it is difficult to measure the value of broadband’s spillovers; un-priced goods with widespread user contributions such as YouTube are difficult to measure since they may not make a profit but still clearly provide users with value. This type of commodity means that while broadband’s monetary costs are easy to calculate, its non-monetary benefits are not. Furthermore, it is difficult to show how much of the associated benefits from such goods can be attributed directly to broadband.

The study’s results have major implications for broadband plans that call for expensive broadband deployment. Policymakers in rural areas may need to reconsider the value of the significant investments required to bring broadband to rural areas. Greenstein and McDevitt do not have a definitive answer, but they do take the first step towards informing broadband policy using transparent economic and statistical methodology.

Feature photo: cc/arnybo