The Economics of ‘Free’ WiFi

Like most local governments in urban parts of the world, the new government of Bhutan has also pledged the provision of free WiFi during the course of the election campaign – and we are to find this idea of free WiFi attractive.

But as an overtly paranoid member of society and an adherent technology geek, I’ll go out on a limb here and say that this judgment may not be based entirely on economic logic. Certain reasons that spring to mind immediately are national branding, commercial lobbying, peak-traffic off-loading, and dare I say, vote-buying.

While I love a good freebie as much as the next Bhutanese, are we as citizens really to believe that the provision of free WiFi comes without any (unintended) consequences? Is this really the best use of our public funds? Where are the terms and conditions of this free provision?

When I hear the term ‘Free WiFI’ this is what I expect:

  1. Freely accessible connection within a local jurisdiction
  2. Provided partly or wholly by a public authority
  3. Produces downstream social and economic benefits

Public networks should support public use, government use and enable those not connected to the Internet and unable to participate in the knowledge economy to get access and become competent users. However, recent economic studies in major urban centers where WiFi was a public provision suggest otherwise. What the exact motive of the government with a less than competitive technology industry is, I cannot say – but I really think a provision like free WiFi might do more economic damage than technological good.

Let me explain:

First, let us consider what type of economic good WiFi is, and the logic for public (i.e. free) rather than market (i.e. paid) provision.

While WiFi that doesn’t have a password can be consumed by anyone in the vicinity – free public WiFi is not a pure public good – i.e. easily accessible and usable by the public.

It is a non-excludable rival good. Even though you may be able to connect to the WiFi network, it doesn’t mean the WiFi is going to work (fast). You will technically get a speedy connection if say only a few people in the area were connected, but say 10 people are using the same network and someone is trying to download the entire season of Game of Thrones – then there’s the problem of crowding out. If you are one of those patient souls who will then still continue using this WiFi, it would be extremely slow. People will start complaining because nothing is ever fast enough for people now.

WiFi can never be a pure public good with the rival nature of connections, and for the simple reason, that access can be easily excluded through encryption keys. This is sometimes called a quasi-public good (a public good where exclusion is possible) but really it is a ‘club good’. And we all know that the economics of a club good implies that the most efficient provision solution is through price-discrimination in the market. The relevant question then concerns the optimal size and sorting of WiFi clubs – given technological constraints in supply and business models in payments – and the extent to which that is distorted by regulation.

Second, we need to review four main economic theories in relation to free WiFi, namely capitalization, market failure, competitive distortion, and inefficiency of supply-side response.

The basic economic objection to free WiFi is that it is a pure ‘rent transfer’. Think about where the 1000 ngultrum you’re saving every month for connectivity is being traded off. Are you now paying more rent simply because the price of property in the WiFi free localities have skyrocketed? I say localities because 100% coverage will be impossible in the short term.

For this reason, the target population of the free WiFi policy – which is presumably a coalition of voters of lower incomes, renters, or students – may yet experience no net benefit once the general equilibrium effects have washed through.

When you take a closer look, it becomes clear that free Wi-Fi is really little more than a patch to a program that’s fundamentally flawed. The real purpose of this distribution is to extract value from the economy and deliver it to those at the top. If the public finds a way to retain some of that value for themselves, the thinking goes, you’re doing something wrong or “leaving money on the table.”

When we have a less than adequate tech infrastructure, can we be certain that free WiFi will provide value to the public? Or that it will not drain the public funds in its entirety simply so that some of us can deliver on our promises?

Free WiFi is a (disguised) monopoly.

Now you might say, wherever there are large fixed costs in establishing a service (say, building the network) and relatively low marginal costs in adding further clients, such that the average cost curve everywhere is downward sloping, the most efficient number of suppliers is ONE. But it then becomes harder to distinguish whether such a natural monopoly is licensed to prohibit wasteful competition, or if it is even being regulated.

Any model where capital and operations are paid for by a third party (but used and provided by different stakeholders) will result in huge cost blowouts. The government will see itself lose all the benefits of this market mechanism. They will have to exercise significant oversight reporting to ensure accountability and transparency, especially if they deem themselves as the agent of change.

The combination of protection from competition and regulated pricing and service delivery invariably means that natural monopolies are not very innovative businesses – they are technologically stagnant and the downside is dumped on the end consumers. What we will have amongst us, is the worst offenders, destroying the market not through creative destruction but via destructive destruction. They will use the power of their capital to undercut everyone, extract everything, and establish a scorched-earth monopoly.

The economic logic is that ‘free’ WiFi is a subsidy to Internet use, thus leading to increased consumer demand. In a monopoly, however, this increases the economic rents that accrue to companies that sell goods that are complementary with increased Internet use. We would thus expect that the coalition of lobbyists seeking to promote free WiFi would be composed of at least local property owners and telecommunication companies. Or are we to assume that the new government will provide this provision without the help of existing telcos? I don’t see how they can!

Third, we should consider the case for ‘free’ WiFi, where local demand discovery is an implicit subsidy for WiFi entrepreneurship and innovation.

The real choice is not between who get the ownership of the free WiFi contract, but rather between whether this intervention takes place on the supply side or the demand side of the market. The case advanced by most proponents of free WiFi is predicated on a supply-side intervention, but standard economic theory suggests that it would be better done on the demand side. This would be WiFi vouchers, allocated to citizens or denizens or those traveling through – based on their exact needs. Rather than having the supplier distribute it as a ‘free’ provision.

This will enable consumers to choose what particular bundles and configurations they want. This should also maximize public surplus. The second benefit is that it furnishes incentives for producers to provide consumers what they want, thus leading to efficient maintenance and bundling without harming innovation and adoption of new technologies.

The provision of Free WiFi can seem at first glance as a policy to level the playing field, however, it merely serves as a way to serve the WiFi providers entrenched at the very top of the economic system. Because of course, the cash issued by the government will inevitably flow to them. Think about it: The government prints more money or perhaps – god forbid –  taxes some corporate profits, then it showers the cash in the form of free WiFI on the people so they can continue to spend. As a result, more and more capital accumulates at the top. And with that capital comes more power to dictate the terms governing the government.

I understand everything comes at a price: Digital monopolists can drain the markets at once and more completely than their analog predecessors. If the objective of the government is to stockpile everyone’s data, then it needs to know how to use it.

Under the guise of compassion, ‘free WiFi’ or ‘free anything’ just turns us from stakeholders or even citizens to mere consumers. If we’re going to get a handout, we should demand not an allowance but assets. That’s right – an ownership stake. (or is it just me?)

In conclusion …

As appealing as it may sound, if the government really wants to reprogram the economy to everyone’s advantage and guarantee an efficient and effective use of the public good – they should start by tweaking the system. Instead of looking at short-term gains – invest in the future of the technology industry, by building a more competitive workforce.

I hope my judgment is wrong – I hope there are reasons for this that my poor brain could not construe. And I hope contrary to expectations, free goods don’t make people lazy. That they will use this added security to take greater risks, become more entrepreneurial, or dedicate more time and energy to improving their communities. A free hand-out doesn’t promote economic equality – much less empowerment. The only meaningful change we can make to the economic operating system is to distribute ownership, control, and governance of the economy to the people who live in it.

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2 Comments

  1. Jimmy Rai April 22, 2019 at 5:49 am

    Is the free WiFI going to provide access to the Internet or just the National WAN?

    Reply
  2. Samira April 23, 2019 at 6:26 am

    Hi there! Such a nice post, thanks!

    Reply

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