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Bridging the digital divide: connecting the unconnected

Richard Morgan Principal, Consulting

Without a robust digital inclusion strategy to address the digital divide, lower socio-economic groups will face increased marginalisation and social exclusion.

Fixed broadbandIn this article, we explore the importance of overcoming the digital divide (particularly among lower socio-economic groups) to meet high-speed broadband take-up targets set by the European Commission. We also look at some intervention options that may assist in improving the affordability – and therefore the take-up – of high-speed broadband services among lower socio-economic groups.

 

What do we mean by ‘digital divide’?

The digital divide often refers to two distinct issues: first, the gap in availability of broadband infrastructure (usually between densely populated urban areas and sparsely populated rural areas); and second, the gap in broadband take-up between certain demographic groups, with socio-economic factors often being key drivers.

Many governments and organisations in Europe are developing broadband policies to address the digital infrastructure divide, by stimulating investment in high-speed broadband infrastructure in rural areas; for example, through the provision of public–private partnerships and structural funds.  The focus of this article, however, is on the options available for tackling barriers to the adoption of high-speed broadband services among lower socio-economic groups, to meet the European Commission’s Digital Agenda for Europe (DAE), which proposes ambitious targets for high-speed broadband take-up.

Only 2% of homes within the EU have taken up ultrafast broadband subscriptions while fixed broadband take-up is only 62%, meaning that 38% of households are still digitally excluded.

The DAE targets are defined as: 100% basic broadband availability to European Union (EU) citizens by 2013; 100% 30Mbps (fast) broadband availability to EU citizens by 2020; 50% 100Mbps (ultrafast) subscriber take-up in homes by 2020. According to the EU Scoreboard,1 basic broadband coverage is available to over 95% of EU citizens and fast broadband coverage is available to 54%. Yet only 2% of homes within the EU have taken up ultrafast broadband subscriptions – and this is the most relevant statistic to this article.

Analysys Mason’s own research demonstrates that the extent of the digital divide is still quite significant in terms of the take-up of fixed basic, fast and ultrafast broadband services across Europe. Figure 1 shows that fixed broadband take-up is 62% for Europe, meaning that 38% of European premises do not have any fixed broadband connection.2

Figure 1: Broadband take-up among European households in 4Q 2012 [Source: Analysys Mason, 2013]

Figure 1: Broadband take-up among European households in 4Q 2012 [Source: Analysys Mason, 2013]

The primary barriers to broadband adoption can typically be classified as follows:

  • lack of understanding of the relevance and benefits of broadband
  • lack of skills or familiarity with information technologies, or confidence to use them
  • affordability of connection and access fees, and devices with which to access broadband.

The first two barriers can be addressed through government programmes to implement education and demand stimulation initiatives such as the development of e-government, e-health, e-learning and e-business, aimed at encouraging the development and use of new broadband applications.

There is a clear correlation between the affordability of broadband services and the levels of broadband penetration, therefore presenting greater challenges in achieving the DAE's broadband take-up targets for 100Mbps services.

Addressing affordability requires other types of intervention. Our analysis shows a clear correlation between the affordability3 of broadband services and the levels of broadband penetration in a selection of European countries (Figure 2). Affordability will present an even greater barrier to adoption in achieving the DAE’s 100Mbps broadband take-up targets, as high-speed broadband usually consists of higher connection and monthly fees than basic broadband services.

Figure 2: Relationship between affordability and fixed broadband penetration [Source: Analysys Mason, 2013]

Figure 2: Relationship between affordability and fixed broadband penetration [Source: Analysys Mason, 2013]

Why does the digital divide matter?

It is particularly important to address the digital divide in order to meet the European Commission’s DAE, which proposes ambitious targets for high-speed broadband services.

Analysys Mason conducted the most comprehensive literature survey of the economic benefits of broadband for the European Commission4 and there is a growing consensus that a 10% increase in broadband penetration results in an increase in GDP growth of between 0.9% and 1.5%; therefore, broadband is important for Europe’s economic growth and development. Our study also highlighted the role of broadband in communities in improving education and skills, increasing employment opportunities, saving money by shopping online, reducing crime, and in improving general well-being.

Low-income groups in affordable housing are a target group towards which interventions can be targeted. Affordable-housing providers may therefore consider subsidising broadband infrastructure or service provision to encourage take-up among tenants.

UK statistics5 show that almost half of the UK’s adult population who do not use the Internet live in social housing6 and are in lower socio-economic groups. Although this statistic will vary across Europe, affordable housing tenants present an easily identifiable target group towards which interventions can be targeted. For providers of affordable housing, it has become increasingly important to make a channel shift in how they communicate with tenants and receive payments electronically, in order to increase efficiency and protect rental income. Affordable housing providers may therefore consider subsidising broadband infrastructure or service provision to encourage take-up among tenants.

Without a robust digital inclusion strategy to address the digital divide, lower socio-economic groups will face increased marginalisation and social exclusion. However, with an ever-increasing reliance upon high-speed broadband communications in our daily lives, addressing the digital divide could be the opportunity to develop future-proofed fibre solutions targeted to lower-income groups.

Strategies to connect the unconnected

The cost of high-speed broadband services is relative to the large investment in infrastructure that must be recouped by operators. By reducing the cost of providing infrastructure to lower-income groups, it may be possible to tailor lower-cost broadband products that bridge the affordability gap. Subsidies from public-sector bodies, affordable-housing providers, or operators’ corporate social responsibility (CSR) budgets may help to bridge this gap further.

It may be possible for operator- and public-sector-led subsidies targeted at affordable-housing communities to reduce the cost of broadband provision to lower-income groups, through demand aggregation or through direct investment in infrastructure.

There are a wide range of options available to improve the affordability of high-speed broadband services, with a particular focus on affordable-housing communities. We have summarised these into three broad categories as shown in Figure 3, with further explanations provided below.

Figure 3: Intervention options [Source: Analysys Mason, 2013]

Intervention options

Description

Risks

Benefits

Market-led –

no intervention

Operators are left to target low socio-economic groups

Likely to work in densely populated areas where operators can generate a return on investment by targeting multi-dwelling units

Market may not lead, as low socio-economic groups are seen as a lower revenue opportunity and a credit risk to operators

No co-ordinated strategy to bridge the digital divide, hence unable to influence DAE targets

No investment required from government or social-housing providers

 

Demand aggregation

A moderate intervention to aggregate demand, making it more commercially appealing to operators

Possibly using CSR or other funds to subsidise connection and rental fees

Requires investment resources to aggregate demand and lead a procurement activity

May not result in significantly reduced price broadband services as operators may use funds to offset risk and to increase profitability

The application of CSR or other funds will reduce operator exposure to financial risk and likely to attract service competition

Broadband connection and rental costs can be reduced if funds applied correctly

Direct intervention

Commercially led joint venture to build infrastructure to affordable housing premises

Requires significant upfront capital investment in infrastructure

May be subject to state-aid challenges if public subsidy involved

High degree of control over technology choice and geographical target

Ability to influence meeting of DAE 2020 take-up targets

 

A market-led intervention is more likely to work in densely populated urban areas where there is existing competition amongst ISPs, where they can see the opportunity to target multiple users in a single premises for themselves and where ISPs have access to affordable backhaul products. However, governments will not have any influence over broadband roll-out and in their ability to meet the DAE targets.

The second example (demand aggregation) requires an organisation (local government authority or affordable-housing provider) to take responsibility for co-ordinating the procurement of affordable broadband services. By pooling demand in this way, ISPs have access to a captive market, increasing the attractiveness of the programme. The availability of capital or revenue funds could be used to subsidise connection and rental fees if applied correctly. It may be possible to influence the DAE targets by setting the requirement for 100Mbps broadband services. However, this will increase the need for subsidy to ensure the broadband services are affordable and care will need to be taken to ensure procurement does not breach any state-aid rules.

The third option will require a carefully constructed venture able to generate a reliable and sustainable income by providing affordable high-speed fibre broadband services to low socio-economic groups to offset the investment in fibre infrastructure. The venture should comprise at least one technology partner to design, build and operate the network, although local stakeholders such as local-government organisations or affordable-housing providers may wish to be a part of the joint venture to influence the priority areas for investment, potentially in return for profit share. However, the involvement of public-sector organisations may introduce state-aid implications; therefore, the sources of funding will have to be assessed carefully.

The above options are intended to be a high-level list of possible intervention strategies to bridge the digital divide and are not exhaustive. The choice of measures taken to bridge the digital divide will be driven by a range of factors such as the socio-economic make-up of the population in each country, the availability of broadband infrastructure, level of broadband service competition, availability of public or private funding, and the willingness of local operators, local government and affordable-housing providers to engage in bridging the digital divide in order to meet the DAE targets.


Analysys Mason has worked with operators, affordable-housing providers and local-government organisations on many aspects of digital inclusion, such as defining digital-inclusion strategies, assessing broadband coverage, modelling funding subsidies, as well as assisting in demand-aggregation procurement.

To discuss our capabilities and experience in this area, please contact Iqbal Singh Bedi (Senior Manager) at iqbal.bedi@analysysmason.com or Richard Morgan (Lead Consultant) at richard.morgan@analysysmason.com.

 


1 http://europa.eu/rapid/press-release_IP-13-528_en.htm

2 Digital exclusion levels are lower because of mobile broadband and access to broadband services outside of the home.

3 Average total cost of ownership derived from Analysys Mason’s Multi-play pricing benchmark 4Q 2012

4 http://ec.europa.eu/digital-agenda/en/news/study-socio-economic-impact-bandwidth-smart-20100033

5 www.go-on.co.uk/files/7613/5826/4061/HousingTechnology_DigitalbyDefault2012_FINAL.pdf

6 Social rented housing is the provision of affordable housing largely to lower income families that is owned and managed by local authorities or registered social landlords, as opposed to being privately owned.