The Economic Geography of Internet Infrastructure in the United States
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A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Greenstein, Shane M Working Paper The Economic Geography of Internet Infrastructure in the United States CSIO Working Paper, No. 0046 Provided in Cooperation with: Department of Economics - Center for the Study of Industrial Organization (CSIO), Northwestern University Suggested Citation: Greenstein, Shane M (2004) : The Economic Geography of Internet Infrastructure in the United States, CSIO Working Paper, No. 0046, Northwestern University, Center for the Study of Industrial Organization (CSIO), Evanston, IL This Version is available at: http://hdl.handle.net/10419/23475 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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The author would like to thank Angelique Augereau, Howard Berkes, Oded Bizan, Pablo Boczkowski,Tim Bresnahan, Paul David, Barbara Dooley, Tom Downes, Chris Forman, Avi Goldfarb, Zvi Griliches, Brian Kahin, Mike Mazzeo, Sumit Majumdar, Eli Noam, Roger Noll, Robert Pindyck, Greg Rosston, Alicia Shems, Pablo Spiller, Dan Spulber, Scott Stern, Greg Stranger, Manuel Trajtenberg, Ingo Vogelsang, Joel Waldfogel, Glenn Woroch, and numerous seminar participants for many useful comments. Jeff Prince provided exceptional research assistance. All errors are the responsibility of the author. Visit the CSIO website at: www.csio.econ.northwestern.edu. E-mail us at: [email protected]. Abstract In this review article I place industrial economics at the center of the explanation for the geographic properties of Internet infrastructure, applying this established mode of analysis to the unique cost structures and demand characteristics of these markets. I begin with an overview of the origins of the Internet and why the economic geography of Internet infrastructure was unclear prior to commercialization. The next sections analyze four overlapping markets of Internet infrastructure: dial-up service, backbone, broadband, and business provision of Internet infrastructure services. The concluding section summarizes the answers to several key questions motivating this broad research area. The Economic Geography of Internet Infrastructure Shane Greenstein _____________________________________________________________________________________ Outline 1. Introduction 2. Dispersion and Concentration of Internet Infrastructure 2.1 What is Internet Infrastructure? 2.2 The Origins of Internet Infrastructure 2.3 Scale and Urban Location 2.4 Scale and Standardization 2.5 Summary 3. The Spread of Commercial Internet Access 3.1 The Activity of Commercial Suppliers 3.2 Government Policy Encouraged a Diverse Geographic Supply 3.3 The Founding of Commercial Organizations 3.4 Coverage by Dial-up Providers 3.5 Organizational Strategy and Coverage 3.6 Variety and Quality over Geography 3.7 Summary 4. The Location of Network Backbone 4.1 The Geographic Features of Backbone 4.2 The Industrial Organization of the Commercial Backbone 4.3 Interpreting Networking Practices 4.4 Interpreting the Geographic Dispersion of Capacity 4.5 The Economic Interpretation of Redundancy 4.6 Boom leads to Bust in the Backbone 4.7 Interpreting a Decade of Building 4.8 Summary 5. The Growth of Broadband 5.1 Why Broadband Favors Urban Areas 5.2 The Empirical Evidence 5.3 The Regulation of Broadband Suppliers 5.4 Summary 6. The Location of Business Internet Infrastructure Services 6.1 The Geography of Private Investment in IT – Overview 6.2 Empirical Evidence on Domain Names 6.3 Evidence on Urban and Rural Business Use of Internet Technology 6.4 Local Internet and Information Services 6.5 Summary 7. Summaries of Answers to Motivating Questions 7.1 Why Did Near Geographic Ubiquity Arise After Commercialization? 7.2 Why Did Market Forces Encourage Extensive Growth? 7.3 Has the Internet Diffused Disproportionately to Urban Areas? 7.4 Is the Internet a Substitute or a Complement for Urban Agglomeration? 7.5 Which Policies Mattered? Were These Effects the Intended or Unintended Consequences? 7.6 Are There Lessons for Other Countries? - 1 - The Economic Geography of Internet Infrastructure Shane Greenstein _____________________________________________________________________________________ 1. Introduction At some broad level, it is no great surprise that there is plenty of Internet infrastructure in Manhattan and not in the Mojave Desert. After all, the strongest factors that shape the location of demand for Internet services are the density of human settlement and the location of industry. Yet, that simple piece of economic reasoning only goes so far in addressing important questions about the location of Internet infrastructure. In other areas of communications a combination of high sunk costs during installation and economies of density in operation make many areas very costly to serve. Remarkably, Internet infrastructure seems to defy that history. Less than a decade into commercialization, the supply of the most basic (i.e., dial-up) Internet infrastructure has become available nearly everywhere in the United States—except in the poorest rural locations. Was this achievement the intended or unintended consequence of government policy? Does that experience offer lessons about the strengths or weaknesses of relying on market forces to build out information infrastructure? These concerns are intertwined with a related event, the diffusion of the next generation of high-speed Internet infrastructure, generically called broadband. Unlike dial-up infrastructure, the earliest build-out of broadband has resulted in uneven geographic coverage that favors urban areas. Is this coverage an artifact of slow build-out or a permanent feature of relying on commercial markets for this service? Addressing these questions presents quite a challenge. The Internet is unlike any communications network that came before it. It is a complex technology embedded in a multi-layered network, and many different participants operate its pieces. When the National Science Foundation (NSF) began to commercialize the Internet around 1992 there were no obvious precedents from which to forecast the Internet’s geographic reach, nor were there simple lessons to borrow from other commercially supported communications networks. In this review article I place industrial economics at the center of the explanation for the geographic properties of Internet infrastructure, applying this established mode of analysis to the unique cost structures and demand characteristics of these markets. It is challenging to do because Internet infrastructure involves an unprecedented mix of new economic actors and incumbent participants, something that one should expect of a new and large economic opportunity. However, unique and unprecedented market activity does not imply the presence of new economic precepts. Some basic (and often not mysterious) economic factors shaped the location of Internet Infrastructure. This analysis makes reference to the same familiar economic concepts that have been seen with other communication networks. Especially central are economies of density and scale in operation, the economies of entry into services with high sunk costs, and the economics of retrofitting technical upgrades on existing infrastructure. The analysis also highlights the economics of competitive behavior for growing markets, behavior not unusual for many new technology markets, but somewhat novel for parts of communications. These themes are often neglected in common narratives about the Internet’s geographic features. - 2 - The Economic Geography of Internet Infrastructure Shane Greenstein _____________________________________________________________________________________ Because the review also seeks to synthesize its themes with the already rich cross-disciplinary dialogue about the Internet’s geography, the review presents its analysis at an intuitive level, eschewing formal economic theory, referring the reader to the writing of others when it is available. I organize the narrative