The Phantom Broadband Problem

Published September 1, 2006

That the U.S. is behind at least 10 other nations in terms of broadband line penetration is common–but not quite accurate–knowledge today, fed by myriad media reporting the same.

What’s true: The share of Americans who are Internet users, as opposed to the share of the population with broadband lines, compares much more favorably to the rest of the world and is higher than other countries often held up as models, such as Japan.

What explains this difference between broadband penetration and Internet users? The answer is that about half of U.S. Internet users still connect via dial-up. Flat-rate unlimited local telephone calls, innovations like “web accelerators,” and competition that has pushed prices below $10 per month have allowed dial-up to remain attractive. While the number of people with dial-up connections should continue to fall, a recent survey by the Pew Internet and American Life Project reports nearly 60 percent of dial-up users claim to have no interest in broadband.

Pointing to the high use of dial-up as evidence of a broadband problem in the U.S. misses the point. These numbers show some people have less demand for broadband than do others. For many, dial-up–often supplemented by broadband access at work–is sufficient for their current needs.

What about available bandwidth, or “speed?” In some countries, notably Japan and Korea, providers advertise Internet speeds many times faster than those available here. Advertised speeds, however, may not accurately represent actual speeds. Providers in Hong Kong advertise some of the highest connection speeds in the world, but the island’s telephone authority recently censured the Hong Kong Broadband Network for misleading claims regarding the speed of its service. Numerous factors affect speeds actually available to customers, including line lengths, the number of users sharing the bandwidth connection, and the location of the content accessed.

Other factors also affect differences across countries. It is less costly to build out the necessary broadband infrastructure in more densely populated areas. Korea is about 16 times more densely populated than the U.S., and more than half of all Koreans live in large apartment buildings. This concentration of people makes infrastructure upgrades less costly. While some small countries with low population densities have higher penetration rates (like Iceland, the current leader in penetration), econometric evidence shows a strong correlation between population density and broadband penetration.

Growing U.S. Broadband Market

Critics contend the U.S. broadband market is a “cozy duopoly”–cable providers and telephone companies offering digital subscriber lines (DSL)–that serves consumers poorly. The facts suggest otherwise. The vast majority of broadband connections are indeed DSL or cable, but they compete vigorously with each other and with new, steadily growing technologies like wireless broadband.

Companies are investing heavily in broadband, and consumers are signing up for it at record rates. The Federal Communications Commission says the number of high-speed lines in the U.S. increased by 33 percent to 50.2 million by year-end 2005. The Pew survey found the number of Americans with broadband access at home increased by 40 percent between March 2005 and March 2006. Companies like AT&T and Verizon are rolling out fiber optic lines that connect directly to residences, allowing for much faster connections than have been available so far.

Broadband access prices are coming down, while available speeds are going up. The Pew survey found the average price of residential DSL service decreased from $38 per month in February 2004 to $32 per month by December 2005. Some evidence suggests prices may have fallen further still, with Verizon, AT&T, Comcast, and others offering service plans at less than $20 per month. As prices fall, providers are upgrading connections and investing in new infrastructure to provide higher speeds to consumers.

Investments in information infrastructure, including broadband, have brought huge economic benefits–possibly accounting for a third of our productivity growth over the past decade. Policymakers should ensure that legislation, regulation, and other initiatives do not have adverse consequences and undermine investment.

The real problem with the international rankings is not that the U.S. appears to be behind, but that they cause politicians and policymakers to focus on silly statistics and favor equally silly policies.

Scott Wallsten ([email protected]) is an AEI resident scholar and senior fellow at the AEI-Brookings Joint Center for Regulatory Studies. Seth Sacher ([email protected]) is a partner at Bates White LLC, an economics consulting firm. This essay was excerpted from a longer work, available online at,filter.all/pub_detail.asp.