Consumer Benefits

Consumer Benefits
The most straightforward estimate of the value of the enhanced availability of broadband derives from
information on consumer subscriptions to broadband services. Currently, no more than 8 percent of
households subscribe to a broadband service; only slightly more than 50 percent subscribe to an Internet
service of any kind; and 94 percent subscribe to ordinary telephone service. Were broadband to become
ubiquitous, it would resemble current telephone service in its household penetration.
An Estimate Based on Current Demand The price elasticity of demand is a relationship of the change in
demand to the change in price. Given a current broadband penetration of 8 percent and an average price
of the service of $40 per month, total broadband revenues may be estimated at $480 times 8.4 million, or
$4 billion per year. Assuming that the demand for such service is linear with an elasticity of -1.0, the value
of the service to these consumers-the consumer surplus-is $2 billion per year in addition to the $4 billion
they pay. If the demand elasticity is -1.5, the consumer surplus falls to $1.4 billion.
If broadband spread to 50 percent of households at $40 per month through a shift of a linear demand
curve with constant slope, the annual expenditure on the service would rise to $31.2 billion. At 50 percent
penetration, the additional value to consumers would rise to between $80 billion and $121 billion per year
at these two price elasticities. If broadband service became truly ubiquitous, similar to ordinary telephone
service, annual consumer expenditures on the service would rise $58.7 billion per year, assuming the
continued shift of the linear demand curve had a constant slope and an annual price of $480. The
additional value to consumers-over and above their expenditures on the service-would be $284 billion to
$427 billion per year, assuming that the linear demand curve with a current elasticity of -1.0 or -1.5 simply
shifted outward. Table 8-8 illustrates this price elasticity of demand.
Table 8-8: Estimated ultimate annual consumer
surplus from increased broadband penetration
Current Price Elasticity of Demand ($ Billions)
-1.5 -1.0
At 8 percent penetration 1.4 2.0
At 50 percent penetration 80.0 121.0
At 94 percent penetration 284.0 427.0
Source: Crandall and Jackson
Home Entertainment By the mid-1960s, a majority of homes in the United States had a television. This
would now be called a wireless residential video service. Subscribers were limited in content to three
channels of programming focused on the evening hours known as prime time. Those subscribers were
forced to be present in front of their video monitors at precisely the time of the broadcast. There was no
means of storing the program for viewing at a later time. The coming of cable TV and videocassette
recorders (VCRs) in the following decades added some flexibility to the TV viewing experience.
Before cable TV and VCRs, subscribers were entirely at the mercy of the programmers. They had to
watch what the programmers offered. The ability to choose programming drove the growth of cable and
VCRs, leading to myriad new businesses, including cable TV companies and video rental firms. For most
programming (films and prime-time TV shows), the production costs were very high and distribution was
costly. This presented a high barrier to entry for any competitors.
The coming of the Internet held out some promise for a break in this regime. However, one barrier
remained to a mass market for video delivered via the Internet-the bandwidth bottleneck. At the time of
this writing, less than 10 percent of U.S. households enjoy broadband Internet. Dial-up Internet access at
speeds up to 56 Kbps is too slow to download a feature-length film. DSL Internet access with speeds of
around 256 Kbps is markedly better, but still requires a few hours of download time to receive a featurelength
film.
What exactly constitutes a viable online video service? Is a short news or sports broadcast from a TV
station made available via the Web a viable video service paid or unpaid? Is delivering an advertorial
from an advertiser a commercially viable video service? Does the video have to be viewed in real time
using video streaming or can the video file(s) be scheduled for an overnight download on the subscriber's
computer? Can the subscriber have multiple computers to download video files around the clock? Is a
feature-length film the only commercially viable form of Internet-based video service? Or are 30-minute
serials or sitcoms also commercially viable online? What if the subscriber downloads or shares video files
of all shapes and sizes at a completely random sequence, stores them in a digital video library, and views
them completely at his or her leisure. One efficient form of delivery is to cache popular video files (films)
on a local server, thus speeding the download. The subscriber can then use a PC to download video for
viewing at his or her leisure, not unlike Personal Video Recorder technology like DirectTV's TiVo.
The freedom to obtain video files at little or no expense and store them in personal libraries presents a
marked departure from the programmer-centric paradigm of the 1960s. This marks a shift in power of
selection from the content programmer to the subscriber as the subscriber now chooses what he or she
will view. More importantly, it determines what the subscriber is willing to pay for-the ultimate test of a
product's commercial viability in a free market economy.
At the time of this writing, file sharing of video files, including feature-length films, has been available
online for years. In October 2002, a start-up firm named Cflix launched a paid video download service
offering a variety of feature-length films and some video serials such as the popular animation South
Park. One month later, a consortium of Hollywood firms launched a service called MovieLink, which
offers recent Hollywood releases for a fee per download via broadband Internet connections.
Broadband Internet via 802.11 with download speeds at around 6 Mbps makes the delivery of video
services much more viable. A number of web sites coordinate the sharing of even the most recent
releases of feature-length films. This sharing of files validated the technical viability of video file sharing
and downloading long before the emergence of Cflix and MovieLink.
Making Money with Online Video So how does one make money on video on the Internet? MovieLink
charges $3 to $5 per feature-length film. The subscriber doesn't get to keep it for that price. After
downloading, the buyer has 30 days to activate the movie, but once the video file is opened, the
subscriber can watch it as often as he or she wants within a 24-hour period. Then it disappears from the
hard drive.
A Cflix subscription, which includes some basic programming, costs $4 per month-considerably cheaper
than other video services. Cflix subscribers pay an additional $1.99 for older movies and $3.99 for new
releases. They can attach equipment to their computers that enables them to watch the movies on a TV
set.[14]
MovieLink is backed by Warner Brothers, Paramount, Universal Studios, MGM, and Sony Pictures, and
offers people with broadband Internet connections downloads of about 175 recent and classic movies. To
be truly useful, MovieLink has to offer thousands of titles, not a couple hundred. Even with an Internet
connection capable of transferring 1 Mbps, it would take around 10 hours to download a 2-hour movie at
that compression setting. More advanced compression technology, such as MPEG-4, may be able to cut
the bandwidth in half while maintaining equal quality, but the download times would still be prohibitive.[15]
How can the economic scope and scale of video over broadband be measured? History is probably the
best teacher. The multichannel video revolution of the 1980s and 1990s created enormous value for
consumers. This explosion in choice created between $77 billion and $142 billion in annual value beyond
the costs of the service (consumer surplus).
The Napster sensation probably provides only a prelude to what is possible over household broadband
connections. At its height, Napster traffic was over one-third of the total traffic on the Internet.
Downloading motion pictures or other video material, interactive television, interactive games, and even
home editing of digitized entertainment material have not even begun in earnest. It is reasonable to
assume that eventually the contribution to the consumer surplus of new video and other entertainment
options created by the widespread diffusion of broadband Internet access would be at least as great as
that already created by cable TV and direct broadcast satellites. This provides the model with an estimate
of $77 billion to $142 billion per year. This estimate is consistent with the remarkable growth in homeentertainment
spending by U.S. consumers since 1980, the year that cable began to grow as the result of
the FCC's deregulation of cable signal carriage (see Table 8-9). Total expenditures have risen by about
$56 billion since 1980 (nominal dollars). If the price elasticity of demand at the current prices is
substantially less than one, the consumer surplus from this increase could easily be more than $100
billion per year. Crandall and Jackson forecast the next broadband revolution-delivered by the broadband
Internet (potentially wireless)-should be of equivalent value.[16]
Table 8-9: Total spending on home entertainment (1980-
1999)
Year
Expenditures by U.S. Households ($
Millions)
1980 4,657
1981 6,292
1982 8,199
1983 10,374
1984 12,742
1985 14,708
1986 16,915
1987 19,869
1988 23,250
1989 23,685
1990 29,822
1991 32,160
1992 34,009
1993 38,016
1994 39,513
1995 42,380
1996 46,647
1997 50,730
1998 55,231
1999 60,765