Localising the broadband debate

Today marks the release of a report commissioned by CEDA and written by me on broadband. It is entitled “The Local Broadband Imperative: Appropriate high-speed Internet access for Australia.” (It is available here).

To begin, a little background. As readers of this blog know, I have been worrying about competition in broadband for some time. Specifically, I am concerned that if it were valuable to invest in better broadband — say, optic fibre to the home — then the problem we face is that this decision is largely in the hands of one firm — Telstra. To solve this, I have suggested, (i) breaking up Telstra, (ii) separating the cable network from the rest, (iii) privatising the copper pair; or (iv) regulating access to the copper pair more stringently. None of these seem likely and at the moment we have a strange debate between the regulator and Telstra with Telstra refusing to make more investments until it receives protection from competition. This seemed frustrating to me as we appeared to lag behind the world in broadband investment. Moreover, there was a bunch of hypocracy in the debate as Telstra when it sought access seemed to dramatically change its tune.

Building on all of this, I have come to the conclusion that, given the constraints we face today, that the debate is all wrong. Put simply, the whole idea that we need a national solution to broadband is misplaced. The constraints are all in the last mile and hence, from a supply perspective, we need lots of local solutions. Moreover, the uses for broadband are primarily social rather than content driven. Once again, since social interractions tend to be local, so demand for broadband will likely vary from location to location.

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.

But there are challenges. If a smaller company wants to connect up a neighbourhood to a fibre network, it needs to connect to the Internet. This means laying lines in conduits and getting access to them. It also means connecting up those lines in exchanges; owned and operated primarily by Telstra. What that means is that to enable local competition, we need some tough regulatory interventions to ensure a level playing field. Contrary to perceptions, broadband is one of the least regulated areas of telecommunications at the moment. I suggest that given the difficulties in generating incumbent investment, it is time for that attitude to change for the ACCC and Federal government to take a tougher stance.

[Update: The press has been reading the report …

“One possibility is that wholesale broadband should be a declared service. Telstra needs more regulation in this area, not less,” he said.

Telstra has rejected this conclusion, arguing that regulation does not lead to competition.

Telstra spokesman Rod Bruem said Professor Gans had overlooked that every part of Telstra’s network was already regulated, including a wholesale broadband service that allowed competitors to lease Telstra’s copper lines from $3.20 a month to provide broadband.

Mr Bruem said that while the Australian Competition and Consumer Commission “continues to allow access to Telstra’s infrastructure at such unrealistically low prices, there is no incentive for anyone to invest in vital infrastructure needed, including Telstra and local councils”.

20 thoughts on “Localising the broadband debate”

  1. Professor Gans fails to disclose that he’s a long-time consultant to the ACCC. Is it any wonder that he attempts to avoid the fundamental economic problems imposed by the ACCC that have made Australia a “broadband disgrace” (as Rupert Murdoch said) and at the same time try to pretend that Australia’s position at the bottom end of the international broadband rankings is actually okay?
    The report suggests it would be better to let local councils around Australia take responsibility for building the country’s ‘internet superhighway’ rather than take a big bang national approach. That’s a bit like suggesting all the nation’s major highways should be built piecemeal by local government – a kilometre here, a kilometre there. We’d end up with a system like the multi-gauge railways around Australia in the 1800s. There’d be gaps and the cost would be much higher without any scale economies. It’s now accepted policy in Australia that telecommunications – a risky, capital intensive business – is best left to the private sector rather government.
    Even if you did take the approach suggested by the Professor Gans/ CEDA report, it wouldn’t work without failing to address the underlying problem that has caused a drought in telecommunications in Australia today – that is outdated regulation. Those regulations have resulted in very low access prices to Telstra’s infrastructure, which make it impossible for anyone to invest and make returns from competing infrastructure. The regulations have seen Telstra’s competitors invest their capital mainly in Asian markets where returns are higher or more certain.
    That problem is best illustrated by the fact that SingTel Optus is now connecting customers to Telstra’s copper network rather than using its own fibre pay TV network.
    Professor Gans repeats the old argument that Telstra should be forced to spin off its fibre network (the Foxtel network) and that would suddenly somehow create competition. If that were a serious proposition, again why isn’t Optus doing good business with its identical fibre network that runs down the same streets as Telstra’s? Or for that matter, why isn’t Macquarie Bank or some other big private equity infrastructure investor beating a path to Telstra’s and SingTel’s doors offering to take the infrastructure off their hands? The answer speaks for itself.

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  2. Actually, I have been a consultant to lots of firms and government authorities (including the ACCC but also against the ACCC too). I am into full disclosure on this and so all of my reports that are public are available at http://www.core-research.com.au. Even today I find myself working on a report for the ACCC but also on a report against them (different matters of course). It is my independence that these folks seem to value.

    I have a question back for you. Myself and Stephen King (now a Commissioner at the ACCC) have been by far the leading proponents of “access holidays.” However, Telstra, while arguing to be free of regulation, never wants to acknowledge this and engage seriously on how to do that. Why isn’t it beating a path to the regulator’s door on that issue?

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  3. Joshua, I’m not sure what you mean by “not engaging seriously” re access holidays?
    Telstra’s experience is that the current “safe harbour” exemptions available to the company under the Trade Practices Act don’t work, although we have seriously engaged with the Commission and tried to use them. If you mean Telstra should be doing more to promote genuine “access holidays” in a policy sense, then I’d expect that is something it will engage in over coming months as part of the ongoing debate for regulatory reform.

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  4. I have read Dr Gans blog for a while and seen his work in other places, and I get the impression that he is pretty thoughtful and open minded on most issues. I have never got the feeling he is biased one way or another on these issues.

    I notice Mr Bruem’s arguements about regulation making telstra’s copper pipes worthless, and no one wants to buy them, but isn’t the converse true, if they are worthless, whi isn’t Telstra giving them away to someone to get rid of an underperforming asset?

    I would think the broader lesson here, and it is supported by both Dr Gans and Mr Bruems comments, is that the currently regulatory framework has proven to not work. It was always predicated on there being a scientifically attainable access price that can be rationally arrived at that satisfies everyone. Maybe the lesson is that that is unatainable.

    But doesn’t that get us back to how do we deal with the undeniable issue that Telstra has a natural monopoly in the copper last mile?

    Obviously the first best solution would have been to chop that bit out of Telstra 20 years ago at the beginning of privatisation (and an interesting question arising from that is that despite that being the conclusion of most of the policy wonks, why did no politician ever supported it?).

    But given we are all past that, what is the best institutional structure to provide the right incentives? Dr Gans proposal isn’t too bad. It is not clear that Mr Bruems anology is valid, obviously different guage train lines are incompatible, but any broad band equipment is going to be standards based – so what if port phillip uses Cisco and Bundorra uses Netgear?

    I think the more interesting analogy proposed by Mr Bruem was that of the roads, although not in the way he expressed it. Most road work (at least by no. of roads) is done by local Government, and they still manage to maintain an integrated road network. Only large significant work is done by State and Federal Government. AS an anology for Dr Gans proposal it isn’t bad, lcoal government does all the local broadband connect and the larger firms run all the backbone connections. It seems like the Road analogy points to it being an effective model.

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  5. I think it is fair to say that much of the present telephone infrastructure (the bits run by Telstra) have been built using taxpayer’s funds and as such there is a reasonable case for allowing all of Telstra’s competitors to use this network. The same cannot be said for any new networks which Telstra might build using it own, (now private sector) capital.

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  6. There’s a lot of nonsense being talked about broadband. I have an ADSL2+ service from iiNet which is nominally 12 Mb/sec, although if I upgraded the router it would be nominally 24 Mb/sec. The technology to deploy this over copper pairs has been equally available to Telstra for some time. My conspiracy theory is that the big T chose not to do this so that it could make fibre to the node sound far more sexy (when in fact for many subscribers it would have been no better than ADSL2+), and with its deployment, lock out competitors.

    Now that FTTN is dead or at least on the back burner, T has decided to deploy ADSL2+, but only from exchanges where other carriers also offer it. Eh?

    ADSL speeds drop off with subscriber distance from the exchange so it is not a universal solution, but it is a good solution, deliverable now, for far more people that are actually enjoying broadband.

    The other thing to be aware of is that broadband is often not very broad. I occasionally see my link operating at full rated speed when downloading files from local servers, but, due to network latency and bandwidth capacity of sites’ web servers, it is unusual to see faster than 5 Mb/sec. Broadband is magic for downloading software updates, video files and large PDFs but makes less difference than you might think to web browsing.

    I am getting 29 millisecs turnaround time to Joshua’s site in Melbourne (on dial-up it would have been about 70 ms) and currently 235 ms to Google (on dial-up, used to be about 290).

    I’d never want to go back to dial-up (which is basically no cheaper for substantial users once you take the phone call costs into account) but don’t expect more with broadband than you will actually get.

    http://www.whirlpool.net.au/ is a good source of practical info about broadband services, ISPs and the like.

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  7. There’s no doubt that T$ are trying to monopolize the Australian Broadband Industry. IMO, nothing will be done to further resolve this problem until an election is held later this year as both parties (Lab/Lib)will use the ‘Broadband’ debarcle as an election cookie. An alternative to ADSL type products/network is VDSL. Other countries are getting speeds 4 -5 times inexcess of ADSL using the VDSL technology. Something to think about.

    Another good site to discuss the Broadband debate that is constantly waging is http://www.broadbandguide.com.au/ They have newly erected forums/blogs.

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