Broadband in Exchange

The Australian telecommunications industry journal, Exchange, published an opinion piece by John de Ridder in December critiquing my broadband report for CEDA. de Ridder argued that if you get access prices right then there is no need for a particular focus on local solutions. He argued that my proposal was not a ‘magic bullet’ solution. Ultimately, I don’t disagree with much that de Ridder says but I felt the need to respond anyhow. My response is out today in January’s Exchange and it is reprinted over the fold.

Local solutions to national issues

John de Ridder gets it wrong when he criticises a recent broadband report I wrote on behalf of CEDA. That report argued that the current debate on broadband has unduly restricted itself to national solutions when there is ample evidence that local solutions should be thrown into the mix.

National solutions to broadband require incentives and perhaps universal service subsidies to be given to national telecommunications carriers – most notably Telstra – but also the G9; each of which have argued for protection against competition to make investment worthwhile. My report challenged the bases of these arguments. It did so on both the supply and demand-side.

First, the supply issue. The investments that need to be made are locality by locality. The backbone to a high speed Internet network is already there. The bottlenecks now are primarily from the exchange to people’s homes. These can be solved by investments at those levels and there is no reason why a national carrier would have any advantage over a myriad of local entrepreneurs in doing this. There are no economies of scale crossing locality to locality. However, allowing local providers will increase competition against the national ones.

Second, on the demand-side it is not clear that the consumer value for high-speed Internet connections is the same from location to location. Demographics are key here. But more importantly, there is no basis to argue that unless all of Australia is hooked up that will magically create some network value that would make it all worthwhile. It is often argued that content would do the job here but the arguments are weak. Where there is national content – such as television – there are alternative technologies that do the job well (e.g., broadcasting). Instead, social interactions may provide the requisite network effects but again a local dynamic is strongest.

de Ridder claims that I am arguing that this compels local provision. I do no such thing. What I argue is that the idea of local provision challenges the need for competitive protection and universal subsidies that national carriers routinely lobby for. Instead, there is a case for governments ignoring these calls and instead focusing attention on frameworks that maximise local competition and do not presume that the same rate of investment will take place across all regions and localities equally. They won’t and they shouldn’t.

How can we achieve this? Well one option is to empower local councils with the challenge of hooking up households depending upon whether they really want to foot the bill or not. They don’t have to invest (I am not arguing to oblige them to) but they need to be given responsibility for the decision as it impacts on their locality. In this way, competition amongst them will drive decisions in much the same way as good garbage collection services and parks does. And local councils around the country are already doing this. I argue that these efforts need further support.

There are bottlenecks that crimp this possibility. For one, access to backhaul is an issue. This is most sensibly done at the exchange level. However, there is no access regime in place there and so no reason for Telstra and other carriers to support local solutions. There is a case for putting in one and a strong one at that. Put simply, the premiums that de Ridder argues for in access pricing (you know to compensate for investment uncertainty) do not apply for existing investments especially when the carriers concerned have publicly stated that they will not be investing. A strong pricing regime can encourage others to invest and that is an option governments and regulators should seriously consider.

Finally, let me put to rest the apparent inconsistency between the arguments in my report and my earlier call to free Telstra from regulation by splitting it up. That earlier recommendation is still the best one but I made it prior to privatisation and that ship has now sailed. We must instead look for second-best solutions. Hence, my newer policy suggestions.

Joshua Gans is a professor of economics at the University of Melbourne. He runs a consultancy that deals with telecommunications regulation (among other things) – CoRE Research – as well as maintaining a blog on these issues at economics.com.au.