Distinguishing Bandwidth and Latency in Households’ Willingness-to-Pay for

Broadband Internet Speed

Yu-Hsin Liu, Jeff Prince, and Scott WallstenOctober 19, 2018

How Do Consumers Value Key Features of Home Internet Connection?

(with a Focus on Speed)

1. WTP for bandwidth highly concave; biggest increases in value < 50 MbpsKey Takeaways

Key Takeaways

2. WTP to reduce latency from satellite to fixed levels is about $8.66.

3. Failing to account for latency causes consumers to exaggerate WTP for bandwidth.

ISPs Invest Billions & Compete on Speed

Policymakers Worry Broadband Too Slow

Bandwidth Determines Whether Policy Considers Service “Broadband”

1999

4 Mbps down1 Mbps up

2010

200 Kbps up or down

2015

25 Mbps down3 Mbps up

2017

NOI

Definition Affects Policy• Mergers

• Universal Service Allocations

• Universal Service Auctions (esp CAF II)

All have real economic consequences.

Definition Does Not Take Into Account Consumer Preferences

• Key question for all relevant policy decisions should be: “Are costs of higher speed worth the benefits?”

What Is Speed?

Colloquially, “Speed” = Bandwidth

But really…

Speed = f(bandwidth, latency)

Bandwidth:The maximum throughput of the Internet path (Mbps)

Latency:The time it takes for a data packet to make the round trip between the user’s computer and another computer (ms)

The Highway Analogy

Implies Two Additional Problems1. Consumers don’t know what “speed” is.

2. Policymakers may conflate bandwidth and latency when setting rules.

Bandwidth

Bandwidth:The value of going from dial-up to low-end broadband was likely large

However, as top-level bandwidth continues to rapidly grow, do consumers still get substantial increased value?

Latency

Latency:Variation largely due to differences in technology (fixed-line vs. satellite)

How much do consumers value the difference?

We Measure Trade-Offs of Broadband Features Using Discrete-Choice Surveys

Allows us to determine:

1. Value of incremental increases in bandwidth

2. Value of latency – in absolute terms and relative to bandwidth

3. Consequences of ignoring latency when measuring value of speed

Related Literature on Internet Demand

Studies Using Market Data:Goolsbee & Klenow (2006)Nevo et al. (2016)Ahlfeldt et al. (2016)Boik (2017)

Related Literature on Internet Demand

Studies Using Surveys and Experiments:Varian (2002)Rappaport et al. (2002)Dutz et al. (2009)Rosston et al. (2010)

We Use a Survey. Why?Allows for sufficient and exogenous variation in bandwidth and latency

Only way to include latency, which does not appear in the common market data

Why a Choice-Based Survey?Mimics the real market

Mitigates reporting inaccuracy of stated-preference data

Has become the dominant approach

Survey ChallengesMitigating hypothetical bias

Describing broadband features

Constructing choices

Four Parts of the Survey1. Demographic questions

Four Parts of the Survey1. Demographic questions

2. Home Internet activities and device use questions

Four Parts of the Survey1. Demographic questions

2. Home Internet activities and device use questions

3. Cognitive build-up to make sure respondents understand the questions

Cognitive BuildupAverageBandwidthLevels

CanStreamVideo/VideooverIPonasingledevice(StandardDefinition,SD)

CanStreamVideo/VideooverIPonasingledevice(High-Definition,HD1080P)

QualitypossibleforStreamingVideo/VideooverIPon2-4devicesconcurrently(UltraHD2160P)

Timetodownload/upload5GBfile(e.g.,2hourHDmovie)

4Mbps Yes 167mins

10Mbps Yes Yes SD 67mins

25Mbps Yes Yes HD 27mins

50Mbps Yes Yes HD 13mins

75Mbps Yes Yes HD 9mins

100Mbps Yes Yes UltraHD 7mins

150Mbps Yes Yes UltraHD 4mins

300Mbps Yes Yes UltraHD 2mins

500Mbps Yes Yes UltraHD 1mins

1000Mbps Yes Yes UltraHD 0.7mins

Cognitive Buildup

AverageLatencyLevels

OnlineGaming VoiceoverIP Web-pageloadingtimeforanaveragewebsite

(Belshe2010)

Lessthan10ms

Unnoticeabledelay Unnoticeabledelay 0.8secs

10- 30ms Unnoticeabledelay Unnoticeabledelay 1.1secs

30- 60ms Minordelay Unnoticeabledelay 1.5secs

60- 150ms Somedelay Somedelay 2.7secs

150- 300ms Significantdelay Significantdelay 4.8secs

300- 600ms MoreSignificantdelay MoreSignificantdelay 8.9secs

Four Parts of the Survey1. Demographic questions

2. Home Internet activities and device use questions

3. Cognitive build-up to make sure respondents understand the questions

4. Choice experiments

Choice Experiments• Choose among hypothetical alternatives• Compare choice to actual current plan

Choice Experiment: ExampleInternetA InternetB InternetC InternetD

Price $45 $70 $80 $35

DownloadBandwidth

25Mbps 75Mbps 1000Mbps 4Mbps

UploadBandwidth

3Mbps 3Mbps 25Mbps 1Mbps

Latency 60to150ms 300to600ms 30to60ms Lessthan10ms

DataCap 600GB 300GB 1000GB Unlimited

PickOne ○ ○ ○ ○

Choice Experiment: ExampleYourChosenPlan YourCurrentPlan

Price Reported/inferredprice

DownloadBandwidth Reported

UploadBandwidth Reported/inferred

Latency Reported/predicted

DataCap Reported/unlimted

PickOne ○ ○

Choices Imply PreferencesPreferences embed trade-offs (between price and broadband components)

Trade-offs tell us about WTP

Two SurveysOne asks about latencyOne does not

à Makes it possible to see how people conflate bandwidth and latency when discussing “speed”

Focus Group Pre-TestNo survey fatigue

Highway analogy & tables helpful, intuitive

Many don’t know all features of current broadband plan

For survey frequently had to infer relevant information

How We Infer Characteristics of Respondent’s Current Plan

Latency – based on location, ISP, plan

Data cap – assumed unlimited

Upload bandwidth – based on technology

The SurveyConducted by ResearchNow

To be included in our sample, respondent must:• Currently subscribe to home Internet• Be household primary decision-maker• Know monthly fee & download bandwidth• Take > 4 mins to complete survey

Sample sizes:• 978 households using latency survey• 433 households using non-latency survey

What People Do With Their Internet

Note: Figure shows weighted average of latency and no-latency survey.

Characteristics of Respondents’ Subscriptions

The ModelWe use standard McFadden-style utility model to estimate preferences:

Utility:

x includes Internet features

Status quo option includes one additional component…

𝑢"#$ = 𝒙′"#$𝜷 + 𝜀"#$

The ModelStatus quo utility:

Allow for distribution of preferences for status quo, per se, that varies by person

Can incorporate using random coefficient

𝑢"#$ = 𝒙′"#$𝜷 + 𝛾𝒊𝑆𝑄"#$ + 𝜀"#$

EstimationWith standard assumption for distribution of unobservables (Type I extremum), we have choice probabilities:

Part 1:

Part 2:

Prob 𝑌"$ = j =ex p( 𝒙′"#$𝜷9

∑ ex p( 𝒙′"#$𝜷9;#<=

Prob 𝑌"$ = j = >ex p( 𝒙′"#$𝜷 + 𝛾𝒊𝑆𝑄"#$9

∑ ex p( 𝒙′"#$𝜷+𝛾𝒊𝑆𝑄"#$9?#<=@

EstimationEstimate parameters using maximum likelihood

WTP estimates are simply ratios marginal utility (β’s)

WTP for download bandwidth is ratio of coefficients on download bandwidth and price:

𝑊𝑇𝑃(𝑏𝑎𝑛𝑑𝑤𝑖𝑑𝑡ℎ) = −𝛽OP𝛽Q

Results: WTP for Bandwidth

Download WTP10 Mbps $14.01***25 Mbps $37.63***50 Mbps $51.80***75 Mbps $59.70***100 Mbps $63.82***150 Mbps $71.37***300 Mbps $75.60***500 Mbps $75.47***1000 Mbps $82.59***

WTP Estimates From the 2 Surveys

Results: WTP for (Lower) LatencyLatency WTP10-30 ms $3.78**30-60 ms -$0.3660-150 ms -$4.03**150-300 ms -$6.45***300-600+ ms -$8.66***

Reducing latency from 300-600+ ms to below 60 ms is roughly equivalent to switching from satellite to fixed-line service.

WTP for Higher Data Caps

Data cap600 GB $12.21***1000 GB $23.57***Unlimited $58.20***

ResultsDownload WTP10Mbps $14.01***25Mbps $37.63***50Mbps $51.80***75Mbps $59.70***100Mbps $63.82***150Mbps $71.37***300Mbps $75.60***500Mbps $75.47***1000Mbps $82.59***Upload3Mbps $10.01***25Mbps $18.57***100Mbps $24.46***Latency10-30ms $3.78**30-60ms -$0.3660-150ms -$4.03**150-300ms -$6.45***300-600+ms -$8.66***Datacap600GB $12.21***1000GB $23.57***Unlimited $58.20***

Results Differ Across GroupsWe allow for differences in WTP across demographics and usage

Education & Income are as we’d expectNotable difference in download

bandwidth

Gamers most notably sensitive to latency

Example: CAF AuctionReverse auction to allocate $2 billion

Bids are scored as function of bandwidth and latency:

𝑠𝑐𝑜𝑟𝑒 = 100𝑠𝑢𝑏𝑠𝑖𝑑𝑦𝑟𝑒𝑞𝑢𝑒𝑠𝑡𝑒𝑑𝑟𝑒𝑠𝑒𝑟𝑣𝑒𝑝𝑟𝑖𝑐𝑒

+ 𝑝𝑒𝑟𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒𝑤𝑒𝑖𝑔ℎ𝑡 + 𝑙𝑎𝑡𝑒𝑛𝑐𝑦𝑤𝑒𝑖𝑔ℎ𝑡

CAF Auction Bandwidth WeightsPerformanceTier Bandwidth UsageAllowance Weight

Minimum ≥10/1Mbps ≥150GB 65

Baseline ≥25/3Mbps ≥150GBorU.S.median,whicheverishigher

45

AboveBaseline ≥100/20Mbps 2TB 15

Gigabit ≥1Gbps/500Mbps 2TB 0

CAF Auction Latency Weights

Latency Requirement Weight

Low ≤100ms 0

High ≤750ms &“meanopinionscore”of≥4

25

Did the FCC Get the Weights Right?

Performance and Latency Weights Should Reflect Consumer Valuation

Bandwidth Weights Reflect Decreasing WTP

Bandwidth Scoring Not Bad!Performance

TierScore Marginal

Reduction in Score

Change relative to previous change

Marginal Increase in WTP

WTP change relative to previous change

Implied WTP per

Point

Minimum 65 . .

Baseline 45 20 $33.37 $1.67Above Baseline 15 30 1.5 $56.73 1.7 $1.89

Gigabit 0 15 0.5 $36.32 0.6 $2.42

Too Much Weight on LatencyPerformance Tier

Reduction in Score From Latency Improvement

Increase in WTP From Latency Improvement

FCC Latency Weight Relative to

WTPMinimumBaseline 1.25 0.26 4.8Above Baseline 0.83 0.15 5.5Gigabit 1.67 0.24 7.0

Latency Tier Points Point Reduction

Increase in WTP

WTP/Point

High 25Low 0 25 $8.66 $0.35WTP/Point for Bandwidth $1.67 - $2.42

TakeawaysValuation of bandwidth is highly concave

Households moderately value latencyExcluding it exaggerates bandwidth value

Without this information policies may inadvertently under- or over-weight characteristics that consumer care about.

FIN

Outline of TalkSpeed & Its Relation to Policy

Survey Design

Data

Estimation & Findings

Takeaways

Speed & PolicySpeed:

Bandwidth:DownloadUploadEvolving FCC benchmarks

LatencyNo benchmark but FCC measurement

began in 2011 (Measuring Broadband America)

Speed & PolicyWhat is Speed?

From a user’s perspective = time it takes to complete a meaningful task

Viewed this way, both bandwidth and latency play a role

Each can be key component to the taskThink video streaming vs. gaming

Speed & PolicyPolicy has typically focused on bandwidth

It is also the focus in private competition

Several concerns arise1. Are policies focused on bandwidth maximizing consumer welfare?

2. How do we incorporate latency into policy?

3. We know little/nothing about how consumers value bandwidth/latency

Representative SampleDemographics

Region, age, race, sex, education, employment status, household income

Representative sample on:RegionAgeRaceSex

Survey DesignCognitive Build-up

Feature descriptions

Follow by asking about:Connected devices at homeUses of home InternetCurrent home Internet plan

Survey DesignChoice experiments

Respondents make 8 choicesTwo parts:

Choose among hypothetical alternatives

Compare choice to current plan

Omitted features assumed identical across alternatives