BUSINESS : ECONOMICS AND POLICY FOR TMT University of Chicago, GSB Austan Goolsbee Week 3

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1 BUSINESS : ECONOMICS AND POLICY FOR TMT University of Chicago, GSB Austan Goolsbee Week 3 BROADBAND 1. What is it? US definition is at least 300 kbps Dial-up maximum 56 kbps, ISDN 144 kbps Available in 75% of zipcodes in U.S. (97% live there) 2. Currently a rapidly growing share of total access Last month, broadband was >65% of minutes Dial-up is falling 3. Prices 2-3X dial-up ($45/mo cable, 30/mo DSL)) Penetration rates still not huge

2 DISTRIBUTION OF ACCESS 1. Nielsen Data--January Year Broadband Dial-Up (+90%) 26.1 (+23%) 39.0 (+49%) 51.0 (+31%) 69.0 (+39%) (0) 79.4 (-6%) 69.6 (-12%) 67.4 (-3%) 65.2 (-3%) Users of the two services look very different Are they different types or do people change behavior?

3 Broadband at Home No Broadband at Home Buy online 80% 65% 10+h/wk-onl home 44% 29% 25+h/wk-onl home 11% 6% 10+h/wk-onl work 18% 11% 25+h/wk-onl work 9% 4.7% Lexus ownership

4 DEMAND FOR BROADBAND 1. FCC/DOJ have ruled it a separate market from dial-up 2. Elasticity of demand estimates of -1.8 to Cross-price elasticity with respect to dial-up p: % of narrow band users say no bb even if p were <$25 5. Big switching costs from DSL to cable & vice versa 6. Chicken and Egg problem 7. How rest of the world differs

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6 Web Connection Speed Trends - Home Users (US)

7 TYPES OF BROADBAND 1. DSL Provided over the phone line (T1-HDSL needs 2 lines) ADSL 1-3 Mbps down, Mbps upstream Need to be close to the switching station to work No congestion but in practice slower than cable 2. Cable modems Need 2-way cable (upgrade) 2-10 Mbps down, upstream Shared on a node with neighbors (congestion?) 3. Most of the world is heavily DSL. We are 60% Cable.

8 BROADBAND DEMAND--ITU

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10 Broadband and Prices BB/1000 P/mo Kor Can Swe Den US Bel Ice Aust Net Ger Jap Nor Swi Fin Spa Fra Por Ausl Ita New UK Hun Lux Pol Ire Tur

11 PRICES IN THE U.S. 1. Prices are not declining in the latest data Cable modems still 60% and those prices rising DSL is getting bigger as prices fall 2. Is cable up from more market power or rising costs?

12 CABLE VS DSL: REGULATORY TREATMENT 1. Since a phone company, must provide access to ISPs Some of the DSL companies were just UNE sellers Open access policy but no price regulation 2. Cable Companies Not subject to open access rules Typically cable owns the ISP/Open Access debate Some argue this is why cable has 60% of domestic mkt 3. Release the phone from most telecom regulation in 2005 Apply universal service to broadband?/911, etc. 4. Battles over local franchising 12/2006 cities have 90 days to decide build out req Telcos tried to get ntl video license Net neutrality

13 CABLE VS. DSL: THE COMPETITION ISSUES 1.Whose investment costs are higher? - the upgrades for cable, DSL, satellite 2. How much market power comes from 1-stop shop - bundle prices 3. How competitive is broadband? - different types of customers 4. Is wireless broadband a serious competitor?

14 Vonage - Leading the Internet Phone Revolution Page 1 of Select Your Country United States this page bookmark this page forgot password? Customer Login Username: Password: Premium Unlimited Plan The Plan: Vonage's Premium Unlimited Plan offers the following for the low price of $24.99 a month: Unlimited calls anywhere in the US (including Puerto Rico) & Canada Included features such as: Voic Plus Call Waiting 3-Way Calling Call Forwarding Free phone adapter if you sign up directly from Vonage Competitive international rates No annual contracts 30-day Money Back Guarantee Caller ID with Name 911 Dialing Added Benefits Switch to Vonage and keep your phone number Vonage has area codes available across the US and in other countries Real time billing information anytime through your online web account Quick access to local emergency services with Vonage's 911 Dialing feature Requirements You must have a broadband Ethernet Internet connection You need a US or Puerto Rico shipping address (no PO boxes) and a US or Puerto Rico credit/debit card Once you sign up, we will ship your startup package within 5 business days. To start saving, simply connect your telephone to your high-speed Internet connection using the Vonage phone adapter. Pick up the phone, and use it just like you do today! Savings Calculator Click here to calculate the start-up costs. Take the Tour Add-ons Add a Line Add multiple phone numbers to your Vonage account. Virtual Phone Number Virtual phone numbers are secondary numbers from any available area code for your primary Vonage line. SoftPhone Give your laptop its own phone number and get 500 local and long distance minutes Great Benefits Keep Your Phone Number Great International Rates Billing Information Online Account Management Money-Back Guarantee Live Customer Support ttp:// 1/23/2006

15 VOICE OVER IP 1. Packet switching versus the current system 2. Essentially voice=data Prices to be by the minute or by the bit? 3. Interesting wrinkles: Have whatever area code you want International calls massive discount - pay only termination fees, not intl settlement

16 Vonage - Leading the Internet Phone Revolution Page 12 of 3 India - Chennai (Madras) 9144 $0.18 India - Gujurat $0.17 India - Hyderabad 9140 $0.18 India - Mumbai (Bombay) 9122 $0.17 India - New Delhi 9111 $0.17 India - Pune 9120 $0.18 India - Punjab $0.18 Indonesia 62 $0.12 Indonesia (Cellular & Premium) 628 $0.17 Indonesia - Jakarta 6221 $0.07 Indonesia - Surabaya 6231 $0.07 Inmarsat (AOR) 871 $12.62 Inmarsat (IOR) 873 $11.91 Inmarsat (POR) 872 $10.88 Inmarsat (SNAC) 870 $10.88 Inmarsat (WAT) 874 $12.35 Iran 98 $0.16 Iran (Cellular & Premium) 989 $0.36 Iran - Tehran 9821 $0.17 Iraq 964 $0.39 Iraq (Cellular & Premium) $0.35 Iraq - Baghdad 9641 $0.29 Ireland 353 $0.06 Ireland (Cellular & Premium) 3538, $0.24 Ireland - Dublin 3531 $0.06 Iridium $8.70 Iridium $8.70 Israel 972 $0.05 Israel (Cellular & Premium) , $0.13 Israel - Jerusalem 9722 $0.05 Israel - Paltel 97222, 97232, 97242, 97282, $0.21 ttp:// 1/23/2006

17 VOIP MARKET FACTS 1. Forecasts of near-term use are very large Diffusion 11.5m by 2010 to Gartner/IDC 20m by 2008 Business use: 20% by 12/05 and 60% by Current usage is small but growing rapidly Dec: m, k, k, k Vonage has dominated paying market so far Cable companies rising: Comcast now #1 3. Business is main customer 2/3 of business users say for video conferencing 4. Consumers half say their primary line, 70% keep their #

18 VOIP 1. Technological improvement-deployment among L-D ATT, MCI, Sprint VZ all have rolled out or announced 2. Now getting entry of major players in local loop Comcast providing huge amount via cable Skype has proprietary format/pc interface 3. Regulatory issues FCC is currently treating as unregulated Now phone call= , no interconnection charges Universal service rules on do not apply - 911, disabled access, rural access, etc. Taxes on VoIP long distance Taxes on VoIP specifically