Broadband in the AFR

I have an opinion piece in today’s Australian Financial Review (reproduced over the fold). This time I try to be more positive about identifying where the Federal government (either party), in particular, might legitimately play a role. And there is plenty for them to do without actually managing the investment itself.

The missing bytes in broadband

Australian Financial Review, 2nd July, 2007.

With the release of the government’s broadband plan, we now know where both parties stand on the issue. They want Australia to have high-speed broadband and they would like someone to build the necessary infrastructure. Each has a tender process with Labor offering to take a joint investment approach and the government a legislative one. But, in many respects, the details will only emerge well beyond the election.

There is one critical point of differentiation. Labor’s plan is for a fibre to the node investment; basically, wires to replace the copper running from exchanges to street corners. The Coalition’s is the same for urban areas but for wireless solutions in the country; an investment already under way through Opel. This has brought criticisms from the opposition and Barnaby Joyce of the two-tier network, countered by government claims that a wired solution in less dense area is uneconomic.

The problem with all this is that the proposals on the table are not diverse enough. When it comes down to it, to take a one size fits all approach to broadband is uneconomic. On the demand-side, localities have different needs for broadband driven by diverse demographics and abilities to pay for broadband services. Let’s face it, what good is broadband in areas where few households have computers in the home?

On the supply-side, the diversity issues are even more critical. Geography dictates the right way of connecting a household to the Internet. Even within urban areas, where both parties are proposing fibre to the node, it is unlikely that this suits everyone. Indeed, many households abandon a wired solution as soon as they get inside the house. It stands within reason that they might not worry about their wireless coming out of the exchange rather than the living room.

What is more is that the tender process locks in national provision. The alternative would be to allow bids on a locality by locality basis. If there are scale economies, a national provider will emerge. But to presume that is a poor way to tender for infrastructure and arbitrarily limits competition to the big players. That hardly serves the long-term interests of end-users.

The problem here is that broadband infrastructure is not a national issue. Sure, the charts that show broadband speeds around the world do so by country. But that is hardly a reason to make these decisions at a national level. Just look at gas and water. No one expects pipes to be laid past everyone’s house and they are not. Many diverse ways of service provision are offered. And that is why these are state or local issues rather than national ones. In a report I wrote for CEDA last year, I suggested that when it comes to broadband infrastructure investment, we need local solutions because they are local problems. There is no national case and to make one leads to an uneconomic lack of diversity.

But the Federal government is not absolved from broadband entirely. There are several areas where their involvement is critical but little has been said about it. First, there are issues of the high cost of data transmission over the Pacific. We have a combination of too little capacity, too few providers and international payments that have crippled our Internet access leaving us to be ravaged by download limits. Only the Federal government can resolve the national issues faced there.

Second, any solution, whether it be FTTN or wireless, requires a resolution of the competition and regulatory issues that have caused the current standstill. If Telstra gets the nod, then these can be side-stepped in favour of a preserved monopoly and a weakening of ACCC powers. But for someone else to get there (the G9 or whomever), the government would have to strengthen the regulation of Telstra to open up competition. Resolving this is a national decision and we still don’t know where either party stand on it.

Finally, the government could step in to subsidise the missing applications that will make high speed broadband valuable. We hear lots about eHealth and eEducation but they have yet to emerge; especially ones suited to Australian issues. Subsidising innovation – especially considering these services have the potential to reduce costs in government provision there – is a sensible direction for national broadband policy to take. But like international interconnectivity and Telstra’s regulation, it is completely missing from current proposals. Without these, neither party can claim to have a broadband solution.

Joshua Gans is professor of economics at Melbourne Business School, University of Melbourne. He blogs on these issues at economics.com.au.