The Economics of Bandwidth Markets Prof. Nicholas Economides Stern School of Business, New York University neconomi@stern.nyu.edu    Economics of Networks server:   http://raven.stern.nyu.edu/networks/

 

  

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• Dramatic reductions in costs in telecommunications transmission and switching

• Dramatic reductions in costs of information processing; significant improvements in interfaces

• Cost reductions and better interfaces made feasible many data- and transmission-intensive services (for example the world wide web

• Exponential increase in data transmission



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• The telecommunications network has open architecture and mandatory interconnection

• Digitization

• "A bit is a bit is a bit" not quite true, since services (and bits) are differentiated by their time immediacy

• For bits of the same immediacy index, arbitrage on the bits may occur

• Presently, regulation imposes price discrimination between data and voice telephony

• If the regulatorily-imposed price discrimination is eliminated, arbitrage on the bits will occur, leading to extremely low price for services, such as voice, that use relatively few bits.

• Even if price remains imposed by regulation, arbitrage on the cost and pricing of bits will lead to a de facto elimination of discrimination.

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• Big investment in data networks by Qwest and others; RBOCs want to create data networks but are not allowed under section 271 restrictions

• Primarily geared to web traffic

• But, they can also be used in the emerging market for internet telephony

• More efficient technology for low bandwidth services

• Originally computer to computer; now computer to PSTN, and PSTN to PSTN

• Deutsche telecom provides PSTN to PSTN internet telephony service; AT&T announced such service in Jan. 98

  

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• Problems with internet telephony
• quality
• incompatibilities among vendors
• LECs do not want to run the networks the way ISPs want
• without connection to PSTN it cannot reap network externalities
• but, if it connects to the PSTN at the switch, it has to pay access
• service issues (billing, operator assistance, etc.)
• avoids regulations
• does not pay for universal service
• it should; universal service subsidies should be broadly raised from all telecommunications services
• does not pay for access
• OK not to pay at present extremely high prices
• has to pay cost-based prices

• Internet telephony is a viable alternative, not an artifact of regulation

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• Failure of the implementation of the 1996 Act; bottleneck of local companies remains
  
  

• Substitutes that bypass this bottleneck
• internet telephony (at present)
• cellular
• PCN
• satellite
• cable-based; emerging market for interactive video/web/telephony 

 

• The FCC has not yet auctioned enough spectrum to allow for a competitive alternative to fixed service (that would bypass the bottleneck)

• At the same time the FCC has given away a lot of spectrum for broadcast HDTV, without imposing the requirement that all HDTV channels on allocated spectrum will be "free"
  
  

• No policy based on efficient use of the spectrum; discrimination between one-way (broadcast) and two-way (telephony) uses of the spectrum