Price Increases for the "Last Mile" Increases Demand for High-Speed Broadband Internet

The increase in prices for the last mile causes a demand increase for high-speed, fibre-based technologies among households. Such price increases prompt customers to replace slower, copper-based wire technologies with high-speed fibre-optic cables. Nevertheless, it is not enough for policy-makers to make price adjustments so as to accelerate the expansion of fibre-based broadband technologies and to increase demand for broadband services on a national and EU level. Instead, new instruments need to be introduced, particularly on the customer side. These are the findings of a study by the Centre for European Economic Research (ZEW), which analysed EU-wide pricing policies for the last mile.

In broadband and telecommunications, the last mile refers to the final segment of the telecommunication access network that delivers the signal to customers. In Germany, most of the last-mile technologies are owned by former monopolist Deutsche Telekom, who rents out last-mile technologies to alternative service providers. The prices for these technologies are regulated by national regulatory authorities.

In view of the benefits of high-speed technologies, the EU and the Member States have committed to expanding fast, fibre-based broadband coverage across Europe. To this end, policy-makers will have to motivate households to replace old with new technologies, and at the same time incentivise service providers to invest in high-speed internet infrastructure. On the supply side, the Digital Agenda for Europe (DAE) gears toward facilitating fast broadband coverage with speeds of at least 30 Mbit/s to all EU citizens by 2020. On the demand side, the DAE aims to ensure that at least 50 per cent of households in the EU subscribe to Internet connections above 100 Mbits/s.

Switching to broadband technology brings price advantages to end-users

The model calculations of the ZEW study have shown that a price increase of one euro for last-mile technologies results in a 1.5 per cent rise in demand for ultra-fast, fibre-based broadband infrastructures across Europe (EU-27). Limiting the analysis to the EU-15, the study reveals demand increases of even 2.3 per cent following the price increase. The reason why price increases for last-mile technologies and rises in demand are correlated is that alternative service providers pass a great portion of the price changes on to the customers. This prompts end-users to migrate from old copper-based technologies to new fibre-based connections (business migration effect) since the relative price for old, low-quality technologies increases.

While such a rise in demand due to price increases has been observed among EU-15 countries, this effect does not hold for Eastern European countries. This is primarily due to the fact that Eastern European countries do not have a well-developed copper-based infrastructure which could be replaced by high-speed fibre-based technologies. "This is why pricing policies targeted at last-mile technologies have no significant impact in these countries," explains Wolfgang Briglauer, senior researcher at ZEW and co-author of the study.

"EU needs to adopt further measures to promote broadband internet"

Policy-makers should therefore not solely rely on access pricing policies in order to achieve the goals specified in the DAE. In particular, price increases of last-mile technologies have a larger incentivizing effect on investments in broadband internet than they have on the households' behaviour. "This further widens the prevailing gap between supply and demand (take-up rate) for high-speed internet in the EU. If the EU wants to equally promote supply and demand for broadband internet, decision-makers will have to adopt additional measures besides price increases for last-mile technologies; these measures need to be primarily targeted at end-users. One option would be to introduce tax reductions or a voucher system," proposes Briglauer.

The study is based on extensive data sets on the use and expansion of fast broadband technologies in 27 Member States. Sources of data included FTTH Council Europe, Eurostat, EU Digital Agenda Scoreboard, and Euromonitor. The model calculations were made using data from 2003 to 2014.

For more information please contact

Dr. Wolfgang Briglauer, Phone +49(0)621/1235-279, E-Mail briglauer@zew.de