The recent debate in Australia over FTTN has centered around the vexing issue of “economies of scale.” The argument is that FTTN requires a big lump of investment. Unless private firms can be assured of earning a decent rate of return on that entire lump, it is not worth investing. At present, for that stated reason, none of the investment is supposedly taking place.
It is very easy to be seduced by this argument and I must admit that I was initially (click here). But one should really be skeptical about equating plans for lots of investment with an argument based on “economies of scale.” Indeed, the early history of the Internet eschews this story. Thanks to government provision, providing access to consumers turned out to be very easy and mainly individual specific. A dial-up connection could be provided relatively easy and affordably to only a small set of users. The end result, dial-up ISPs emerged all over the place.
Broadband is a tougher access task. However, it is not a national endeavour. If you want to build, say, a large base-load power plant, you need to be assured of demand from a million or more households or establishments. With broadband, each investment that is required is in the tens of thousands in a very limited geographic coverage. With enhanced broadband, each investment (say a FTTN connection) requires revenue from several hundred customers. And when we get down to FTTH, it is one connection per home.
What this means is that to justify improvements to broadband infrastructure, a firm does not require a return over all areas. Instead, on an area by area basis, the firm must make an adequate return. Not surprisingly, as with other similar services, the prospects of making a return will vary from location to location. For the same reason, we should expect broadband infrastructure investments to vary from location to location. (Click here for a recent paper by Downes and Greenstein that demonstrates this for the US).
This has an important implication for calls for universal service obligations for broadband. Put simply, to impose on any one company (especially Telstra) or to want any one company (especially Telstra) to make ubiquitous investments in broadband across the country would be foolish.
Now this is not to say that a desire for universal access might be warranted. It is just to say that obligating a single company to do this is unwarranted and unnecessary.
[…] There are many implications of this. First, no universal service obligation is required for broadband. Second, we can just ignore Telstra. If the investment does not need to be national in scale then we don’t need Telstra’s national presence. Smaller companies can do the job. […]