Economics of Selling Online

I wrote in an earlier post about the digital divide – in particular, it was about who is buying online. Now I ask, “What is the global digital divide?” And is the gap closing?

What is the Global Digital Divide?

The global digital divide represents the differences in internet and other telecommunications access and usage across countries. The global digital divide encompasses two concepts. First, there is a divide in access and usage across definable groups within countries, and second there is a divide in access and usage across countries themselves.

Individual country statistics routinely show an intra-country digital divide. In a Pew Internet and American Life study and nearly all the countries surveyed in a 2008 OECD study, internet use within OECD countries decreases with the age of the user, increases with the education of the user, and increases with the income of the user. Globally, households with children are more likely to use the internet and urban/suburban users more likely to have access than rural users. And in many countries men access the internet more than women. This same study also found that internet access varies with firm size. Larger firms (firms with more than 100 employees) are twice as likely to have internet access than smaller firms.

According to Internet World Stats, the latest number of world internet users in October 2008 is 1,463,632,361 which represent 21.9% of the world population. I have reproduced some of this data in Table 1. Between 2000 and 2008 the number of users grew at a rate of 305%. The highest percentage of users per population (known as “internet penetration”) can be found in the North America, 73.6%, and the lowest percentage of users can be found in Africa, 5.3%. Asia may have the largest number of total users of the Internet, but access is still largely concentrated in the higher income urban areas (Kuang 2008). However, the fastest rate of growth of users is in the Middle East. While the Middle East only represents 2.9% of world usage, its rate of growth since 2000 is an astounding 1,175.8%. A similar pattern can be found in Africa where usage by only 3.5% of the world’s users has grown at a rate of 1,031.2%. While these numbers seem staggering , when you begin with a low number of users initially, even a small increase in the number of users can lead to big growth rates.

An enlightening image of the digital world, shown here in Figure 1, illuminates the relative densities of Internet connectivity across the globe. The U.S. and Europe are literally lit up with connections, while Africa and parts of Asia are dark. The map illustrates connections around the world, but this is not usage. In areas such as Africa, the density is low but usage may be higher because many people may be using a single connection (e.g., in an Internet Café) (Rogers 2008).

Figure 1: World Connection Density, Image provided courtesy Chris Harrison, Carnegie Mellon University

Is the global digital divide closing?

Countries with low penetration rates can expect to see bigger gains in the global digital divide. The change in the digital divide “pie” is represented in Figures 2 and 3. Perhaps it is not best to treat the global digital divide as a pie of a certain size such that gains in one area represent declines in others. Statistically, the global digital divide will naturally decline as internet access in developed countries gradually grows closer to population limits (i.e., as penetration rates draw nearer to 100%). It is best to view the pie as growing, and a reduction in the digital divide would see the pie becoming closer to representing population differences. Increasing access in developing countries need not take away from the access of current of users; however, it can, as countries deal with such issues as the bandwidth sharing (Kuang 2008) and the current IPv4 address shortage (OECD 2008).

Figure 2: Source Internet World Stats, http://www.internetworldstats.com/stats.htm

Figure 3: Internet World Stats, http://www.internetworldstats.com/stats.htm

What causes the global digital divide?

According to recent studies (e.g., Chinn and Fairlie 2007, OECD 2001), there are several major contributors to the global digital divide including differences in income, literacy, infrastructure, and the regulatory climate. As expected, the lower income developing countries have lower access to the Internet. In countries where people worry about from where their next meal will come, internet access is less likely to be their major concern. In these same countries, illiteracy also complicates internet usage. When the internet is accessed, users must share a very low bandwidth. As a result, text based internet pages are the most likely to be successfully accessed. The irony is that these pages often cannot be read because of low literacy levels and translation difficulties. These users are deprived of the audio and video components of the web that would be most beneficial to them due to low bandwidth. “The lowest broadband speeds available to affluent countries, such as Japan, Singapore and South Korea, are faster than the maximum broadband speeds in Bangladesh, Cambodia, Laos and Tonga.” (Kuang 2008) One OECD study shows that a single user in Japan has access to more bandwidth than the 45 countries with the lowest bandwidth combined (OECD, 2004).

In the past, the focus of reducing the global divide centered on expanding landlines to increase dial-up access. In one 2001 OECD study, expanding broadband via cables was the major emphasis for expanding access. In just a few years “those previously described as ‘haves’ as dial-up users would be considered ‘have nots’ for the emerging broadband divide.” (OECD 2004, pg. 7) In OECD countries, broadband subscribers increased by 11 times between 2000 and 2006 (OECD 2008, pg. 11). Expanding broadband into developing countries is still a prominent interest of telecommunications companies and governments. However, while the positive externalities in terms of productivity and economic growth of laying submarine and land fiber optic cables are potentially profound, governments often view internet access as a public good. This creates issues as to who should pay for creation, access, and even repair of the cables. (e.g., Waltner, 2006, and Johnson, 2008). A variety of public and private telecommunication structures has developed connecting to one vast network. Public policy analysts fear that monopoly pricing and limited access by private firms will continue to isolate vast geographical areas (e.g., see CIPESA, 2006). One OECD (OECD 2004) study suggests that the solution to the global digital divide is through liberalizing telecommunications markets while keeping a sound regulatory framework.

How can the global digital divide be reduced further?

Studies of the global digital divide often focus on both internet access and pc availability. Moves to expand laptop and pc availability to developing third world countries will help increase access to broadband and reduce the global digital divide. However, the popularity of mobile communications in developing countries may suggest that satellite technology is the medium of the future. In 2002, the number of mobile phones outnumbered fixed phone lines globally. (Euromonitor International, 2007) Mobile phones are less expensive for developing country citizens and providing access is cheaper for firms than building or repairing landline infrastructure. It is therefore easier to use satellite transmission to extend access in these areas. The US, UK and Italy are leaders in mobile Internet penetration with 15.6 percent of mobile subscribers in the US, 12.9 percent of subscribers in the UK and 11.9 percent in Italy who actively use the mobile Internet. (Nielson Mobile 2008) A Nielson report in July 2008 finds that while the US leads in overall mobile internet usage (of total users), other nations, such as Russia, Brazil, and India, are now using mobile devices as the primary mechanism for getting online. Mobile phone use in the Sub Saharan Africa grew 67% in 2005 and currently outnumbers North American customers. (Waverman 2007) A company called O3b Networks, backed by Google, Liberty Global, and HSBC Principal Investments, is currently producing a satellite-based infrastructure to bring high speed internet access to developing countries in Asia, Africa, Latin America and the Middle East by late 2010. This company faces obstacles similar to those facing broadband providers, such as various regulatory structures, particularly government owned telcos, that control prices of access in the countries that seek it. (Cherry, 2008)

Concluding Thoughts

As I mentioned above, the global digital divide will naturally tighten as user rates become closer to population levels. This requires coordination via companies that produce the broadband and satellite access, telcos and ISPs that provide the access to the consumers, and governments. Provision of access alone will not close the divide. The cost of that access for the consumers, their income, their literacy level, and their willingness to learn new technologies are also factors. There are many groups seeking to reduce these burdens and provide the tools necessary to equalize access to these markets, including those that volunteer funds and equipment (e.g, One Laptop Per Child program and other programs), accords between governments, and cooperation between private companies.

Bibliography and Selected Readings or Sites:

Kuang, Peng. “Asia picks up broadband fast, but poor still disconnected”, 15 September 2008, http://www.scidev.net/en/news/asia-picks-up-broadband-fast-but-poor-still-discon.html

OECD. “Internet Address Space: Economic Considerations in the Management of IPv4 and in the Deployment of IPv6” , May 15, 2008, http://www.oecd.org/dataoecd/7/1/40605942.pdf

OECD. “Understanding the Digital Divide”, 2001, http://www.oecd.org/dataoecd/38/57/1888451.pdf

OECD. 2004. “Regulatory Reform as a Tool for Bridging the Digital Divide” http://www.oecd.org/dataoecd/40/11/34487084.pdf

Chinn, Menzie D. and Robert W. Fairlie. “The Determinants of the Gobal Digital Divide: A Cross-Country Analysis of Computer and Internet Penetration”, Oxford Economic Papers 59 (2007), 16-44, doi: 10.1093/oep/gp1024.

Waltner, Charles. May 31, 2006. “International undersea fiber optic cable promises much needed bandwidth to East Africa but specter of monopoly pricing threatens project’s benefits”, News@Cisco, http://newsroom.cisco.com/dlls/2006/ts_053106.html

Johnson, Bobbie. “How one clumsy ship cut off the web for 75 million” February 1, 2008, The Guardian, http://www.guardian.co.uk/business/2008/feb/01/internationalpersonalfinancebusiness.internet

Bridging the Global Digital Divide, One Laptop at a Time, June 11, 2008, Knowledge@Wharton, http://knowledge.wharton.upenn.edu/article.cfm?articleid=1978

Critical Mass: The Worldwide State of the Mobile Web, Nielsen Mobile, July 2008, http://www.nielsenmobile.com/documents/CriticalMass.pdf

Schewe, Sarah. “Nielsen reports mobile internet usage has reached ‘critical mass’”, July 18, 2008, http://www.editorsweblog.org/multimedia/2008/07/nielsen_reports_mobile_internet_usage_ha.php, Accessed October 30, 2008

Mobiles, The Digital Divide, And Google, Google Tech Talks, January 12, 2007, Waverman, Leonard, http://www.youtube.com/watch?v=87-b-fyZZos

Cherry, Brett. Satellites to bring speedy Internet to developing world, 18 September 2008, http://www.scidev.net/en/news/satellites-to-bring-speedy-internet-to-developing-.html

Rogers, Madolyn Bowman. Mapping the Digital Divide, Symmetry Magazine, September 2008, Volume 5, Issue 4, http://www.symmetrymagazine.org/cms/?pid=1000639

Heimbuch, Jaymi. Closing the Global Digital Divide: Technology for Developing Countries, Central Coast, California on 10.15.08, http://www.treehugger.com/files/2008/10/closing-the-global-digital-divide-technology-in-developing-countries.php

CIPESA. “The Eastern African Submarine Cable System (EASSy): The Open Access Challenges and Debate”, Collaboration on International ICT Policy for East and Southern Africa, May 2006, http://www.cipesa.org/files/EASSy%20doc.pdf

Interesting Related Images:

Submarine cable map: http://www.telegeography.com/products/map_cable/index.php

Damaged and proposed cable: http://image.guardian.co.uk/sys-images/Technology/Pix/pictures/2008/02/01/SeaCableHi.jpg

Large cable ships that lay and repair fiber optic cable http://www.iscpc.org/information/Cableships_1.htm

The Global Digital Divide, Euromonitor International, http://www.euromonitor.com/The_global_digital_divide, 2007

World Internet Connection Density, Chris Harrison, http://www.chrisharrison.net/projects/InternetMap/index.html

Global Traffic Index – how fast data moves around the world. http://www.internettrafficreport.com/main.htm

Visualize African Connectivity with Physicist Les Cottrell.

With all the focus these days on Joe the Plumber, I couldn’t resist the desire to use the nation’s newest cliché. But this post’s topic is not on the issue of taxes on small business that Joe so artfully brought to the forefront but rather on the issue of the effect of net neutrality regulation for businesses selling online. The issue has gained importance in the past year, even prompting Senator Obama to declare it a priority in his first year if elected to office of President. (Broache 2007)

What Is Net Neutrality?

Net neutrality is unfettered access to content on the Internet. Net neutrality legislation would prevent Internet providers from controlling user access to certain content on the Internet. The Internet’s function is to move content from provider to user. While this seems obvious enough for those of us who have grown accustomed to a growing Internet, some believe that there lurks a growing potential for Internet Service Providers, who control access to the Internet, to begin using that control in such way as to filter or limit access to certain sites and services.

To understand the threat this imposes, it is helpful to view the Internet as a broad set of connected pipes. Data travels through these pipes, known as bandwidth, which is shared among consumers. When some consumers devote large amounts of time to downloading music, streaming movies, and consuming other forms of rich media, they essentially begin clogging the pipes of the Internet which affects the service to other consumers that share the pipe. To reduce this effect, ISPs can either upgrade (e.g. widen) the pipes, improve the technology (e.g., speed data through the pipes) or reduce the traffic at either its source or destination. Unfortunately, widening the pipes or improving technology takes money, and many of the ways that ISPs can raise this money have been viewed as impediments to providing a neutral network that does not discriminate based on the nature or source of the content that moves through it. Ways that ISPs could raise this money involve charging the users, charging the content providers, or filtering the content that goes through the current pipes.

Currently, many ISPs charge the consumers a flat fee for unlimited access to the pipes. This method of charging consumers essentially has the lighter Internet users subsidizing users that download large volumes of rich media. Recently some ISPs have begun allowing consumers to self-select into the wider or faster pipes via tiered and metered usage pricing schemes. For example, I pay $10 more per month to have my broadband service delivered at download speeds up to 20.0 megabits per second – supposedly double the speeds that 10.0 customers receive. Presumably, it allows me to work on my blog while my spouse searches the Internet, my older son plays Xbox Live, my daughter talks to friends using VOIP (our phone service via our ISP) and my other son works on his school project on his laptop - all without any significant loss in performance of these online activities. Although tiered pricing is not new (i.e., it was used by ISPs such as AT&T Broadband, Charter Communications and Cox Communications as early as 2002 to curb illegal movie downloading and music swaps), ISPs around the nation are testing similar plans (again). For example, Time Warner’s latest plan is to allow consumers to choose a tiered plan based on usage while allowing customers to monitor their usage in order to choose the right plan. (Bosworth 2008) “One way or the other, as video becomes a bigger part of overall broadband usage, it is inevitable that usage-based plans supplant current ‘all you can eat’ plans. Video is the reason.” (Kim 2008) In Australia, the three major ISPs use a price discrimination plan based on quotas that limit the access of the consumer to the Internet and charge heavier users who go over these quotas additional usage fees. (Winterford and Hill 2008).

In each of these cases, paying for service upgrades is coming from charging the users of the content. Where the biggest source of concern seems to be is that ISPs might begin charging content providers who provide and encourage the use of the many forms of rich media, such as YouTube, iTunes, MSN, Yahoo, peer-to-peer sites, etc. Content from these sites tend to “clog the pipes” more so than text content. The fear is that ISPs will charge premium fees to these content providers to prioritize and push their content through the pipes at faster rates than providers who don’t pay premiums. Or ISPs might simply charge premiums to content providers who have sites heavily laden with rich media. In which case, those firms with deeper pockets will be more successful at reaching and serving the consumer. With net neutrality legislation filtering or slowing content would be illegal. An example of what such legislation might look like can be found in a bill introduced into the Senate in January 2007 co-sponsored by Senator Obama and his former Democratic opponent Hillary Clinton titled the Internet Freedom Preservation Act. A similar bill was introduced into Congress titled the Internet Freedom Preservation Act of 2008 in February 2008. Neither bill seems to have made it out of committee.

A recent case that led to sanctions by the FCC (which represented its first net neutrality ruling) brought the issue of a non-neutral net into the spotlight. Comcast, the nation’s second largest ISP, was managing (or delaying) the use of bandwidth by its consumers with respect to peer-to-peer technologies such as BitTorrent. These activities gobble up bandwidth and clog the network pipes. Comcast claims that it simply limited these activities during high Internet traffic times. In a joint statement in March, Comcast and BitTorrent issued a joint statement that they were working together to solve the bandwidth issue and that government intervention is unnecessary. “Both BitTorrent and Comcast expressed the view that these technical issues can be worked out through private business discussions without the need for government intervention.” Regardless, the FCC’s decision to sanction Comcast came on August 1, 2008. On September 5, 2008, Comcast filed a suit against the FCC to overturn the decision. Also, as a result of the suit, beginning on October 1, 2008, Comcast will include a quota or monthly cap on users in its pricing strategy. These quotas are extremely high and meant to snare only the highest bandwidth hogs. This plan is an alternative to slowing a particular service or access to any one site.

What Does Net Neutrality Mean for Small Businesses Selling Online?

According to Cummings (2007), small businesses fear that telephone and cable companies will “rig the system so that the Web pages of premium-paying customers would open faster and be ranked higher than those that don’t pay the extra fee.” This puts smaller businesses at a disadvantage to larger businesses. She quotes Branch Heller, a retiree in Delaware, who says the law is needed to ensure that big corporations can’t dominate the Internet by censoring content or slowing — or blocking — links to their competitors’ customers.”

This issue particularly affects small businesses that sell or provide rich media content such as movies, music, interactive games, training videos, etc. online. ISPs could use their positions to slow access to these sites. Another fear is that Internet service providers may want to charge premiums to prioritize traffic connecting to some sites. Better and faster service would be provided to sites of firms who pay higher premiums.

However, another issue is that many small businesses are also turning to various forms of rich media for advertising online. Rich media advertising is a fast growing form of online advertising. This form of advertising may include sound, video, or Flash, and with programming languages such as Java, Javascript, and DHTML. These slow the loading of web content and may add a strain on the network. The Interactive Advertising Bureau is attempting to set standards for this media to reduce the strain. Examples may be found here. DoubleClick’s study of its online advertisers learned that customers are 5 time more likely to click video ads, that video ads usually play at least 2/3 of the way through, that users click the video “Play” button more than they click on image ads, and that 8% of video ads generate a user reaction. Some rich media ads even allow consumers to interact with the seller even without leaving the current site they are visiting. PointRoll says that rich media accounted for 116% click-through rate over standard banner ads and that consumers spend an average of 14.7 seconds of time with the brand. These are all topics for posts on another day but these stats will lead to an increased interest and therefore use of this pipe clogging media. Control of access to that media is feared to be in the hands of those who hold the pipes. Because of that control, proponents of net neutrality want preventive legislation. Opponents say that legislation leads to further regulation of the Internet.

What Are the Presidential Candidates’ Views of Net Neutrality?

One look at the Presidential candidates’ websites illustrates the extent to which both candidates use rich media on the net. Both Presidential candidates have opinions about net neutrality, and as expected, their views fall along party lines. Senator Barack Obama believes that net neutrality should be legislated.

“I will take a backseat to no one in my commitment to network neutrality…Because most Americans have a choice of only one or two broadband carriers, carriers are tempted to impose a toll charge on content and services, discriminating against Web sites that are unwilling to pay for equal treatment. This could create a two-tier Internet in which Web sites with the best relationships with network providers can get the fastest access to consumers, while all competing Web sites remain in a slower lane.” (Interview with CNET News)

Here are some relevant and related excerpts from Obama’s Technology Plan:
• Barack Obama strongly supports the principle of network neutrality to preserve the benefits of open competition on the Internet.
• Obama will encourage diversity in the ownership of broadcast media, promote the development of new media outlets for expression of diverse viewpoints, and clarify the public interest obligations of broadcasters who occupy the nation’s spectrum.
• Barack Obama and Joe Biden will use technology to reform government and improve the exchange of information between the federal government and citizens while ensuring the security of our networks. Obama and Biden believe in the American people and in their intelligence, expertise, and ability and willingness to give and to give back to make government work better.
• Obama and Biden believe we can get true broadband to every community in America through a combination of reform of the Universal Service Fund, better use of the nation’s wireless spectrum, promotion of next-generation facilities, technologies and applications, and new tax and loan incentives.
More on Senator Obama’s views can be found here.

Senator John McCain believes that net neutrality should be regulated only if necessary. McCain’s plan focuses on letting markets and firms go as far as possible in ensuring a neutral network and use regulation only when the market fails. Perhaps the negotiations between Comcast and BitTorrent are an example of such a settlement.

“In general, I believe that we need to move to a different model for enforcing competition on the Internet. Its focus should be on policing clearly anticompetitive behavior and consumer predation. In such a dynamic and innovative setting, it is not desirable for regulators to be required to anticipate market developments, intervene in the market, and try to micromanage American business and innovation.” (Interview with CNET News)

McCain’s technology plan suggests that existing antitrust legislation can handle many of the issues that may arise that cannot be privately negotiated. Some excerpts from the McCain Technology Plan:
• Given the enormous benefits we have seen from a lightly regulated Internet and software market, our government should refrain from imposing burdensome regulation. John McCain understands that unnecessary government intrusion can harm the innovative genius of the Internet. Government should have to prove regulation is needed, rather than have entrepreneurs prove it is not.
• John McCain will focus on policies that leave consumers free to access the content they choose; free to use the applications and services they choose; free to attach devices they choose, if they do not harm the network; and free to chose among broadband service providers.
• John McCain does not believe in prescriptive regulation like “net-neutrality,” but rather he believes that an open marketplace with a variety of consumer choices is the best deterrent against unfair practices.
• As President, John McCain would continue to encourage private investment to facilitate the build-out of infrastructure to provide high-speed Internet connectivity all over America. However, where private industry does not answer the call because of market failures or other obstacles, John McCain believes that people acting through their local governments should be able to invest in their own future by building out infrastructure to provide high-speed Internet services.
More on McCain’s views can be found here.

Net neutrality is sure to become an issue that resurfaces again and again. The issue is so large that I can’t possibly have done the topic the justice it deserves here, but hopefully it is a little less mysterious. In my Bibliography and Additional Reading, I included additional sources if you have further interest in the issue.

Bibliography and Additional Reading

Broadband Access Policy: The Role of Antitrust, J. Thomas Rosch, June 13, 2008, http://www.ftc.gov/speeches/rosch/080613broadbandaccess.pdf

No Need Now For New Net Neutrality Regulation, Tom Giovanetti, 05/03/2006 http://www.ipi.org/ipi/IPIPressReleases.nsf/0/c656d6236605f60785257163007936e8?OpenDocument

Inside Obama and McCain’s Conflicting Takes on Net Neutrality, Glenn Derene, October 8, 2008, http://www.popularmechanics.com/technology/industry/4286547.html?series=46

Frequently Asked Questions about Net Neutrality, http://www.savetheinternet.com/=faq

Obama pledges Net neutrality laws if elected president, Anne Broache, October 29, 2007, http://news.cnet.com/8301-10784_3-9806707-7.html?tag=mncol;txt

Net neutrality is an ‘American problem’, Brett Winterford and Julian Hill, ZDNet.com.au, 24 September 2008, http://www.zdnet.com.au/insight/communications/soa/Net-neutrality-is-an-American-problem-/0,139023754,339292161,00.htm

Test of Tiered Pricing for Broadband Access, Gary Kim, Thursday, January 17, 2008, http://ipcarrier.blogspot.com/2008/01/test-of-tiered-pricing-for-broadband.html

Time Warner To Test Metered Pricing For Broadband, Martin Bosworth, Jan. 17, 2008, http://www.consumeraffairs.com/news04/2008/01/tw_bandwidth.html

Obama Biden Technology Plan, http://origin.barackobama.com/issues/technology/#open-internet

John McCain Technology Plan, http://www.johnmccain.com/Informing/Issues/cbcd3a48-4b0e-4864-8be1-d04561c132ea.htm

Comcast to Appeal FCC’s Decision On Internet Blocking, Amy Schatz, September 5, 2008, http://online.wsj.com/article/SB122055137368500197.html?mg=com-wsj

Comcast to Cap Data Transfers at 250 GB in Oct., Chloe Albanesius, 08.28.08, http://www.pcmag.com/article2/0,2704,2329170,00.asp

Video Ad Benchmarks: Average Campaign Perfomance Metrics, A DoubleClick Rich Media and Video Report, February 2008, http://www.doubleclick.com/insight/pdfs/dc_videobenchmarks_0702.pdf

The Human Face of Net Neutrality, Jeanne Cummings, April 9, 2007, http://www.politico.com/news/stories/0407/3461.html