Financial considerations and technology investment patterns in a network industry

In this study we examine the role that financial considerations play in influencing investment patterns within a network industry. Specifically, we evaluate the effects of lower access prices (the costs of connectivity) and cross-subsidization on investments in technology to expand the bandwidth provided by local exchange carriers in the United States. Lower access prices and greater cross-subsidization increase cash flow, and the availability of additional financial resources can be an important determinant of firms’ investment strategies. We examine investments by firms in Integrated Services Digital Network (ISDN) technology, the initial technology that enabled the firms we studied to increase their bandwidth and provide their customers with greater access to the Internet. Using data from 1994 to 1998, we found that lower access prices and cross-subsidization played key roles in increasing cash flow, which in turn facilitated investment in the new ISDN technology. This phenomenon has implications for both corporate strategy and public policy affecting investment in new technologies.