I have a piece today in the Australian Financial Review on broadband (reproduced over the fold). For regular readers, it might strike you as something very new. Put simply, I take as a political constraint that the government is going to invest in high speed broadband. I argue that it should not go halfway (something that I have argued before). Instead, it should build the whole 100Mbps+ network capable of doing all telecommunications and set-up a state-owned entity in direct competition with Telstra. In the article, I outline the numerous reasons why now is the time for such action. Sometimes it is more efficient to invest more money compared to a cheaper plan that would neither bring us up to world best practice, would benefit the rich in society (because access would not be cheap) and would not buy us real competition.
By the way, Kenneth Davidson in The Age today writes that “The fixed network is a natural monopoly. It is impossible to conceive a NBN running parallel with the existing copper network.” Clearly, I do not think it is impossible to conceive of that.
Plan B is 21st Century Communications
Joshua Gans, Australian Financial Review, 24th November 2008
It is obvious to everyone that, despite the best of intentions, the National Broadband Network (NBN) tender process is not going to plan. $4.7 billion being put on the table has sparked only limited interest and even that is fragile. Telstra is driving a hard public bargain on regulation and structural separation and may not participate. This is hardly a surprise as they are in a position to roll out their own network in the most profitable areas of the country and keep those profits for themselves. Other bidders, also not surprisingly, want to stop that from happening. It is a mess.
But the tender should not be the only game in town. If the government receives poor bids for the NBN, it can and should reject them all. There are alternatives that would fulfill on Labor’s election promise and maybe, in these troubled economic times, be a much better deal for the country.
Now I have been skeptic as to whether the proposed fibre to the node network covering 98 percent of the country with 12Mbps or greater download speeds is worth the government dollars. In my mind, it is a proposal stuck in the middle. It commits us to mediocrity (12Mbps will barely keep us at the average in the OECD and the price to consumers will still be high) and does not address the main economic benefit of government involvement: securing a competitive telecommunications (not just broadband) industry.
So let’s think big. What if the government rejected all bids as inadequate and embarked on building its own NBN? And not just one with mid-range bandwidth but instead a ‘world best’ target for a change: 100Mbps or even 1Gbps speeds. This would likely require fibre to the home in most places and, in others, some serious mobile technology. It would probably cost in excess of $15 billion but these costs would be spread over a number of years. An NBN could not be built in a day.
That is a big price tag but the advantages are many-fold. First, the government would control the price to users and could target low income households more effectively as well as providing services that were open if used for education and health (saving costs elsewhere). Second, the government itself would become a strong telecommunications provider in competition with Telstra. That will benefit homes and businesses everywhere. Third, that competition would allow us to dismantle most telecommunications regulations in the country once the network was operating.
But it is fair to ask: why now? Well, the world has changed since Labor made its initial broadband promises. Specifically, the social cost of government expenditure has dropped considerably as the need for fiscal stimulus becomes apparent. And this stimulus should not just be throwing money at pensioners and consumers. It needs to be done in a way that creates jobs and builds productive capacity. So when telcos inevitably howl over this proposed government investment in terms of lost jobs, the retort is straightforward: we will employ the people and the contractors. An army will move around the country laying cable and supporting the new broadband customers. Moreover, it will target key groups most vulnerable if private business should curtail its investing plans.
But wait, there’s more. With the global economy slowing, broadband investment elsewhere will slow. That will drive down the costs of purchasing equipment and optic fibre. It will also give us an opportunity to catch-up. Australia can emerge from recession with a 21st Century telecommunications industry, well-placed to take on the world. If we complement this with investments in capacity over the oceans, we can open up opportunities for video conferencing (saving on airplane emissions) and even a cloud computing facility located in cooler places such as Tasmania or perhaps, with cooperation, New Zealand.
By moving to Plan B, the government also has the opportunity to optimise its plans. While one possibility would be for it to have a state-owned corporation do the entire job, in reality, there are other ways to get a network built. For instance, the government could build or lease the backbone from existing providers. It could then use tax credits to encourage localised initiatives to build fibre or other high-speed options in the last mile. Last week, Google’s Derek Slater and Columbia University’s Tim Wu proposed just that. Their ‘homes with tails’ approach reconceptualises who owns the network. It need not be a provider but it can be users themselves. Consortia or local governments could provide the means by which neighbourhoods invested in fibre networks and then contracted out their maintenance and management. It would become a home owner’s asset in much the same way a new pool or a nice garden is. Consumers would recoup their investments in saved access fees as well as increased property prices.
For Slater and Wu, a real constraint would be how these local networks connected to the broader networks. But with a government-owned network, establishing Open Points of Presence could be done at the stroke of a legislative pen rather than through the uncertainty of years of negotiated regulation that would otherwise be required.
If broadband is of critical national importance as the government claims it is, the time for half-measures is over. A bold plan to leapfrog the competition and place Australia at the technological leading edge is both appropriate and timely given our macroeconomic circumstances. Fussing around as private enterprise tries to gain the best deal for their shareholders is wasting time and energy. Let it go Minister Conroy and move to a plan B that doesn’t just meet but exceeds your election promises.
Joshua Gans is a professor of economics at Melbourne Business School. His extensive writings on broadband can be found at economics.com.au.