Broadband in the AFR

I had an opinion piece on broadband policy in today’s Australian Financial Review. It is over the fold:

Needed: smarter policy on speed

AFR (19th March 2007, p.63)

A funding and regulatory king-hit on broadband is tempting but not the solution, writes Joshua Gans.

Does the broadband debate have a chance of working out sensibly? Throughout last year, we watched the debate become clouded because of the impending final tranche of the government’s sale of Telstra. It was constantly argued that regulatory uncertainty was going to devalue Telstra’s assets and that the government should intervene to ensure certainty.

If the government had hoped the sale would silence the debate, it was mistaken.

Today there appears to be a stand-off. Telstra continues to argue that Australia won’t get the broadband it needs unless it receives some certainty that its investment returns will not be taken away by the regulator. Ironically, this argument itself is creating a cloud of uncertainty in the broadband debate and in the run-up to the federal election the cloud looks set to spread.

Broadband performance is relatively easy to measure. South Korea and Japan stand out with high speed connections to homes and Singapore is not far behind. In Europe, speeds exceed Australia and for a much lower cost. And in the US, households face multiple provider options and the potential for real competition. All this adds up to a simple election issue.

Why aren’t we where they are?

The simple answer is because no one has spent the money yet. The highest speed broadband exists in locations marked by government intervention and expenditure. In other places, it is the pressure of competition that is pushing things forward – but only where the demand is. Indeed, we see this in Australia. We have world-leading broadband where the demand is: in the CBDs of our capital cities.

So governments, and potential governments, looking to resolve this debate as an election issue, can do so by pledging money, right? Well, almost right. Governments can save money that is a direct or indirect subsidy to private providers of broadband infrastructure by offering investors protection from competition. Not surprisingly, of the potential providers out there, each is asking for both money and protection.

Telstra will invest if it can ensure its monopoly position. The Australian Competition and Consumer Commission has challenged Telstra to apply for a regulatory exemption and the certainty that affords but Telstra has not come forward. Instead, it wants competitors to pay a high negotiated price to access the network. It would also like the government to intervene in the ACCC’s decisions here.

The G9 consortium (Telstra’s rivals) will invest if they can ensure that Telstra won’t overbuild their investment. One would think that given Telstra’s reluctance that wouldn’t be a worry but their memories extend back to cable television and the street-by-street duplication there. Otherwise they are happy for a cost-based access price. This is an improvement over Telstra’s demand but still might require a government handout. It will also require legislative action because such guarantees are outside ACCC’s hands.

It is easy to wonder whether we all might be better off with simple government provision (like the broadband leaders) rather than specific actions in the midst of an election that might compromise the independence of our competition regulator. Remember we are in this mess because competition has not really had a chance to work. We remain the only leading economy with a single owner of both the cable and copper fixed line networks. Had they been separate, competition might already be doing the job.

What is more, it is unclear that we need these investments right now. The main benefit of higher broadband speeds is delivery of media like internet television. But the demand for those services seems at best unproven. And we already have a decent substitute – broadcast television. This not to say that basic broadband around the nation would not be useful. But one has to remember that the current debate is around higher speed broadband and not basic access.

So we risk a situation whereby election promises add up to wasteful government expenditure and a compromised competition regime. This is opposed to a more careful consideration of policies that might foster long-term competition and also a locality-based rollout where the demand for broadband might match investment. A big bang solution is not what the country needs even if it is the easiest path to silencing the debate.

Joshua Gans – Joshua Gans is professor of economics at Melbourne Business School and an adviser to ACCC on regulatory matters

3 thoughts on “Broadband in the AFR”

  1. The broadband debate consistently ignores the fact that technology exists to deliver up to 24Mbps over existing copper phone lines (for subscribers, speed diminishes as distance from exchange increases but a very large number of people could receive at least 5Mbs. At best I get 12. If I upgraded the router I might get 24.)

    However Telstra has only recently agreed to start installing ADSL2, and only in exchanges where other carriers have already supplied it. This seems an extraordinary stance to take.

    What consistently gets lost though is that few web servers can manage to deliver at anything like that speed. Also, given the trans-Pacific latency (150ms+) and more across the Atlantic for European sites, no technology is going to bring blink-of-an-eye internet service to us here anytime soon.

    Windows Task Manager suggests that I am getting about 600Kbps download speed from this site. My iinet 12Mbs connection therefore is no more useful in browsing it than a 1 Mbs Telstra connection (although it is cheaper).

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  2. Mike,

    while there is a high latency to offshore areas, the same can not be said for local ones. This difference might make you choose local sites instead of international ones which would encourage local companies to invest.

    As for a single site getting 600kps, while this might be true. the issue for me is when my wife is watching internet-video, I am on a VOIP conference call, and my daughter wants to play a game.

    on a 1M line, these activities would interfere with each other. on a 12M line they have less of an issue, and the bottleneck moves from my access point to a router on a backbone link somewhere.

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  3. Ian,

    You are quite right. I wouldn’t go back to a 1Mbs link when 12 ia available. We run 2 computers very happily via a router.

    The points I wanted to make though were firstly that absence of ADSL2 for many Telstra customers has been a political constraint not a technical one, and secondly that, even so, people may expect more from genuinely high speed internet than it currently delivers.

    In regard to the latency of local sites, the big driver in Korea for high speed broadband was multi-player gaming, particularly MMORPGs. For this, low latency is an absolute requirement, so game servers have to be local.

    Multiplayer games are now driving take-up of 3GSM mobile services in Korea, where the game of choice is Hero’s Lore 2.

    Whether Australians exhibit a similar enthusiasm for multiplayer games remains to be seen.

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