Transforming Internet Prices: The Impact of Submarine Cables and Regulatory Frameworks

The World Bank's study finds that submarine cables significantly reduce internet prices through cost savings and increased competition, with the impact varying by region. Effective regulatory frameworks are essential to maximize these benefits and ensure market competition.

The World Bank's Policy Research Paper explores the influence of submarine cables on the affordability of internet access. Submarine cables are crucial for international connectivity, providing high-speed internet access essential for modern economies. This research tests the hypothesis that the deployment of submarine cables can lead to lower internet prices through cost savings and increased competition. The study employs an empirical framework using data from 150 countries over a decade, combining information on submarine cable capacity with internet price data for both fixed and mobile services. The analysis employs a two-way fixed effects estimator to isolate the impact of submarine cables on internet prices.

A Deep Dive into Cost Savings

The results indicate that the expansion of submarine cables is associated with a statistically significant decrease in internet prices, with reductions ranging from 14 to 21 percent for every doubling of cable capacity, depending on the technology. These effects are more pronounced in certain regions, highlighting significant disparities. The study attributes these price reductions to short-term cost savings achieved through economies of scale, reduced data rerouting costs, and enhanced network resilience due to the redundancy provided by multiple cables. However, these cost-saving effects tend to diminish over time, particularly as the domestic telecom market concentration increases. This trend suggests that the initial benefits of submarine cables in reducing prices are eroded by growing market power among a few dominant players.

The Crucial Role of Regulation

The study also emphasizes the role of regulation in enhancing the positive impact of submarine cables on internet prices. Effective telecom regulations, particularly those ensuring the de-jure independence of the regulator, regulation of network interconnection and access, shared telecom infrastructure, and competition from international players, can significantly boost the price-reducing effects of submarine cables. Regulatory frameworks that promote open access to submarine cable capacity and prevent market monopolization are crucial in sustaining competitive pressure and passing on cost savings to end-users.

Short-Term Gains and Long-Term Challenges

The research finds that cost savings are the primary drivers of the observed price effects in the short term. These savings arise from economies of scale due to increased international internet bandwidth, reduced rerouting costs, and lower network maintenance expenses. In the medium term, the role of competition becomes more significant, as the regulatory environment influences the extent to which cost savings are passed on to consumers. The presence of an independent regulator with a broad mandate to enforce competition, manage interconnection rates, and oversee market dominance is essential in ensuring that the benefits of submarine cables are widely distributed.

Regional Disparities Highlight the Need for Tailored Approaches

The study's findings are robust across various estimation strategies, including instrumental variable and staggered difference-in-differences approaches. These methods confirm that the deployment of submarine cables leads to a substantial decrease in internet prices, with the effects varying by region. In regions with lower initial internet prices, such as Africa, the impact of submarine cables is more limited compared to regions like Latin America and the Middle East, where the price reductions are more substantial. This regional variation underscores the importance of tailored regulatory approaches that consider local market conditions and the specific challenges faced by different countries.

Maximizing the Benefits of Submarine Cables

Overall, the study underscores the transformative potential of submarine cables in enhancing internet affordability and supporting digital inclusion. By providing high-capacity international connectivity, submarine cables can significantly lower the cost of internet access, fostering economic growth, innovation, and social development. However, the long-term sustainability of these benefits depends on effective regulatory frameworks that promote competition and prevent market concentration. Policymakers must prioritize the development and enforcement of regulations that ensure open access to submarine cable infrastructure and foster a competitive telecom market.

The World Bank's research highlights the critical role of submarine cables in reducing internet prices and the importance of regulatory frameworks in amplifying these effects. Submarine cables provide essential international connectivity, and their deployment can lead to significant cost savings and competitive pressures that benefit end-users. However, the long-term impact of these infrastructure investments hinges on effective regulation that promotes competition and prevents market monopolization. As countries continue to invest in digital infrastructure, the lessons from this study can guide policymakers in maximizing the benefits of submarine cables and supporting affordable, high-quality internet access for all.