Broadband generates $32B annual 'consumer surplus' in US, study finds

The study on the economic benefits of broadband comes as the United States debates how to best improve broadband access and quality to underserved regions of the country

Broadband connectivity is delivering U.S. households an annual consumer surplus of around $32 billion, according to a new study from economic consulting firm Compass Lexecon.

The study, funded in part by the Internet Innovation Alliance universal broadband advocacy group, found that consumers have been increasingly willing to spend more money for their broadband connectivity than what they're actually paying. This difference between what users are willing to pay and the actual price is known in economics as the consumer surplus and is used as a broad measure of how much benefit consumers receive from buying a particular good.

To conduct the study, economists Mark Dutz and Jonathan Orszag used data taken from Forrester Research's annual North American Benchmark Survey that polls about 30,000 heads of households every year to ask them about their broadband spending habits. Looking at the data, Dutz and Orszag found that U.S. households' demand for broadband was roughly $32 billion higher than what they actually paid for it in 2008. This $32 billion broadband consumer surplus represents a 58% increase from 2005, when broadband connectivity in the Untied States generated an estimated consumer surplus of around $20 billion, the study says.

In addition to finding an increasing consumer surplus for broadband connectivity, the study also found that demand for broadband services has become increasingly less elastic over the past five years, meaning that increases in broadband prices are less likely to lead to significant decreases in demand. In 2008, the study found that a 10% increase in broadband prices would lead to a 6.9% decrease in demand for broadband services. In 2005, by contrast, a 10% increase in broadband prices led to a 15.3% decrease in demand for broadband services.

Interestingly, price elasticity for dial-up Internet services has remained roughly the same over the same period, as a demand for dial-up services has decreased between 9% and 9.6% in response to a 10% increase in prices. In other words, it seems that access to broadband services has grown more important to consumers over the past four years while the importance of access to dial-up services has stayed roughly the same.

When the study broke down consumers' willingness to pay for broadband services, it found that younger users and users with a college education were willing to pay more money than older users and users without a college degree.

College-educated users said they were willing to spend an average of $30.19 per month on broadband services, while users who had a high-school diploma or less said they were willing to spend an average of $25.20 per month for broadband.

In terms of age demographics, users in the 18 to 24 age range said they were willing to spend an average of $31.19 per month for broadband services, while users in the 25 to 44 age range said they were willing to spend an average of $29.80 a month for broadband services. In contrast, users in the age range of 45 to 64 were willing to spend an average of $27.23 a month for broadband services, while seniors were willing to spend an average of $25.82 per month for broadband services.

Users in both urban and rural areas were both willing to spend roughly the same amount each month for broadband services, despite the fact that rural areas have far less access to broadband services than urban areas.

Dutz and Orszag also found that broadband users were far more likely to use their Internet connections for business and commercial applications than dial-up users. For instance, 21.8% of broadband users reported using their connections to access their employer's network last year, vs. only 8.4% of dial-up users accessed their employer's network through their home connection. Meanwhile, around 80% of broadband users reported buying a product online using their home connection last year, vs. roughly 62% of dial-up users who reported buying a product online using their home connection.

The study on the economic benefits of broadband comes as the United States debates how to best improve broadband access and quality to underserved regions of the country. As part of the economic stimulus package passed earlier this year, the federal government allotted $7.2 billion to fund broadband infrastructure investment over the next two years. Of that money, $4.7 billion has been given to the National Telecommunications and Information Administration to award grants for projects that will build out broadband infrastructure in unserved or under-served areas, to deliver broadband capabilities for public safety agencies and to stimulate broadband demand through training and education. The remaining $2.5 billion in broadband stimulus money has been allotted to the Department of Agriculture to make loans to companies building out broadband infrastructure in rural areas.

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