Economist Says Internet Use Is Limited

(July 9, 1999) Bruce Owen, President of Economists Incorporated, told an audience at the American Enterprise Institute on July 8 that home Internet use is not growing very fast, and that the government should stay out of subsidizing access to the Internet. He delivered a lecture on his new book, The Internet Challenge to Television.

Bruce Owen decried what he called statistical "hype" coming from those with a financial interest in the success of the Internet. "The fact is that very few people surf the net," Owen wrote in his book. "Doing so requires time, money, technical skill, and interests that the average consumer lacks."

Owen also pointed out in his talk that the percentage of American homes with a PC is not growing, and that surveys show that the average amount of time spent online is not growing.

Owen also criticized efforts by government regulators and elected officials to regulate and  subsidize access to communications media. He also predicted that the government would eventually extend universal service to include Internet access. He wrote that the "Telecommunications Act of 1996 contains provisions requiring the FCC to impose a tax on users of telephone and other communications services in order to fund subsidies that will ensure the availability of "universal service." It can only be a matter of time before the definition of universal service includes Internet access."

Owen's lecture contrasted sharply with a report released the same day by the Clinton administration. The report is titled Falling Through the Net: Defining the Digital Divide.

It states that Internet use is soaring, but that the poor and racial minorities are in danger of being left behind, so the government should facilitate Internet access.

Bruce Owen

Bruce Owen spoke at the American Enterprise Institute for Public Policy Research on Thursday morning, July 8. The audience was comprised mostly of AEI scholars, interns, and members. FCC Commissioner Harold Furchtgott-Roth, who was once an economist at Economists Incorporated, also attended.

During the question and answer segment of the program Owens received support for his criticism of FCC regulatory policies. However, he was challenged on his basic thesis regarding the limited success of the Internet. One person commented that he focused too much on home PC ownership and Internet access data, and not enough capital markets. "The real data is in the capital markets," said one member of the audience. "The resources are moving out there because something is happening."

Another person stated that it is important to look at Internet access at work, not just at home. Another commented that Owen had examined the Internet's inability to displace television with entertainment content, but had not focused on the Internet as an electronic commerce medium.

The AEI is a large Washington DC based think tank dedicated to preserving and strengthening the foundations of freedom, particularly free enterprise.

Bruce Owen's book deals extensively with the history, technology, economics and regulation of the various communications media. The excerpts from the book below relate mostly to statements about government regulation of the Internet.

"One might think, from all the hype, and from seeing Internet addresses on the sides of every other plumbing truck and car wash, that most Americans are daily surfers of the net. The fact is that very few people surf the net. Doing so requires time, money, technical skill, and interests that the average consumer lacks. Users of the Internet, especially for services beyond e-mail, constitute a tiny fraction of the population. ..."

"Even today only a small minority of consumer households have access to the Internet. But a constellation of commercial interests hopes to profit from Internet development. As a result, what people know about the Internet is mostly from hype rather than from experience. Both the commercial part of the Internet and the volunteer sector have obvious network externalities that encourage them to engage in Internet hype. Suppliers of Internet-related hardware and software have even better reasons for hype, as do academics and other experts."

"So effective is the hype that a lack of understanding and expertise does not prevent politicians and others from urging the universal availability of Internet access, subsidized if necessary at the expense of other communication services. ..."

"For years, convoluted telephone industry pricing and other distortions have perpetuated subsidies that have no rational basis and for the most part never did. For example, the supposed telephone subsidies running from long-distance service to local service, from business service to residential subscribers, and from urban to rural callers for decades have been treated as sacred cows by regulators and legislators, to the point that policy changes designed to make the industry more efficient and competitive have been postponed or rejected whenever those subsidies are threatened. And yet there is little evidence that any of the subsidies accomplish even such simple objectives as benefiting needy people or other groups with any claim to benefit at their neighbor's expense. ..."

"Commercial and political interests use these subsidies as a power base, and fight ferociously to keep them in place. Old subsidies, however  unjustified or irrational, create for their beneficiaries an equity right in the status quo. Broadcast licensees and other spectrum users, residential telephone customers, and others who benefit from government-mandated subsidies will not easily give them up, and neither will the elected representatives to whom they make contributions."

"There are signs the Internet may be headed down the cross-subsidy road. ... Predictably, the politicians want to make sure that the new technology does not merely benefit the rich and the information-elite -- that is, those willing and able to pay for it. So programs are designed to bring the "information superhighway" to the urban and rural poor, to the bedridden, to elementary schools, to libraries, and so on, whether or not those targeted recipients have any use for it or value it more than other services that could be provided at the same cost. Because the government has no funds to pay for all this, the funding must come from a tax on other users of the Internet or the telephone."

"The Telecommunications Act of 1996 contains provisions requiring the FCC to impose a tax on users of telephone and other communications services in order to fund subsidies that will ensure the availability of "universal service." It can only be a matter of time before the definition of universal service includes Internet access."