CBO Report Reviews Residential Broadband Market

Nothing in the performance of the residential broadband market suggests that federal subsidies or other government intervention will enhance the market from the perspective of economic efficiency, concludes the Congressional Budget Office (CBO) in a new report, Does the Residential Broadband Market Need Fixing? CBO prepared the report for the Senate Budget Committee, reviewing recent trends in the market for residential fast Internet access to determine whether there are impediments to the market's growth.

Since 1999, CBO states, the adoption of broadband services by households and businesses has increased at a rapid rate. CBO points to two key Federal Communications Commission statistics to support its case:

• As of December 2002, 17.4 million households and small businesses subscribed to high-speed lines for Internet access, compared to just 1.8 million in December 1999. And,
• In 1999, more than 40 percent of the nation's zip codes had no broadband service subscribers. By the end of 2002, the number had dipped to 12 percent.

Some contend the market could experience greater penetration if the federal government were to intervene and provide financial incentives. Two dozen bills that ultimately would increase federal spending or decrease revenues have been introduced by federal action proponents, CBO reports.

CBO examines the relationship between residential broadband services and the telephone and cable companies that provide the majority of the service. Combined, these companies provide an average of more than 90 percent of broadband services nationwide. Were two dominant firms in individual markets to keep prices above the cost of providing service, CBO argues, "too few people might subscribe to a broadband service at too high a price relative to the prices that would prevail in a more competitive market — a situation known as a market failure."

To keep with its mandate to provide objective, impartial analysis, CBO offers no policy recommendations. The report cautions, however, that "interventions to increase the number of subscribers are likely to be offset by losses in other markets, leaving the economy as a whole worse off."

In drawing its conclusions, CBO points out it did not consider concerns over equity in access and regional economic development — points of greatest concern to most tech-based economic developers following the issue. Much of the legislation introduced in Congress deals as much with these issues as with efficiency.

Satellite and other wireless technologies, while five times more prevalent in 2002 than in 1999, represented less than two percent of the connections and were considered by CBO as not presenting much competition or impact on issues of economic efficiency. However, rural economic development groups contend wireless connections can present a formidable but still expensive option for overcoming "last mile" issues to encourage economic growth in less densely populated regions.

Does the Residential Broadband Market Need Fixing? is available at http://www.cbo.gov/.