Broadband in The Age (Day 1)

In today’s Age is the first of a five part series I have written on the broadband debate. I start with the value of broadband and tomorrow will at the case for broadband as a public good. Most of the arguments are familiar to regular readers of this blog but it is good to have the opportunity to discuss the issue outside the constrains of a few hundred words.
Think carefully before leaping headlong on to the big, fast broadband wagon

Joshua Gans, The Age, 10th November, 2008

Day One: The value of broadband

THIS month I am celebrating the 10th anniversary of broadband in my home. In 1998, I received my service through Telstra’s new BigPond Cable and today I still get my service through this way. I have been such a long and loyal customer that my username is so simple that it leaves the help desk in awe whenever I call in.

Things have changed, however. Back then I was lucky to be able to download at 32 kilobits per second (Kbps) and my download limit was just 100 megabytes (MB) a month. You might think that that didn’t go far but at those speeds, it didn’t have to.

I was able to send and receive emails and I could look at the news and weather. There was a benefit from being always on but that was it. And all this cost me about $70 a month which, given local call costs, was not much more expensive than dial-up.

Today, my residential connection is probably the fastest in the country. At 40 megabits per second (Mbps), it leaves Telstra’s technical support in awe. And it is far more reliable now with little downtime.

I have ramped up my download limit to 60 gigabytes (GB) per month that I never get close to. Gone are the days of watching carefully large attachments or shying away from rich multimedia sites. And I now pay Telstra more for the privilege, $129 a month.

In many respects, I am the consumer of whom broadband providers dream. I have the computing power to take advantage of multimedia websites and a sensitivity to technological frontiers that makes me willing to cough up for more speed just because it is there. It is precisely because most people are not like me that we do not have higher speed broadband connections around the country.

This is probably a good thing. My preferences are not wholly rational. For starters, while I can clock 40Mbps, that is for a local site. Try watching some video hosted internationally and the best I can get is usually 2Mbps. So, for the vast majority of content, I am paying a premium for potential speed that I never actually get. Put simply, that is perhaps a $70-a-month gift to Telstra.

Eventually, our connectivity to the world will improve and so the potential will translate into the actual.

But until that happens my purchase of additional speed makes little sense.

It is in this context that in this series I will look at the broadband debate in Australia. The economics of broadband are as simple as supply and demand. To supply high-speed broadband services, an infrastructure provider needs enough customers willing to pay a premium for that speed above slower services that are ubiquitous around Australia. But technological bottlenecks, including international back-haul capacity as well as the speed of networking equipment in the household, stand in the way.

Apart from that, the case for higher speed is a hard sell. Snappier website loading is nice but we are still talking seconds of saving over basic broadband. With a high-speed connection, a TV-show-length video download might take 10 minutes (at the Government’s target of 12Mbps), up from 40 minutes for basic broadband. That is seemingly a significant saving but if you realise that with say, Apple’s iTunes Music Store or YouTube, you can start watching while you download, you perhaps save a few minutes with the faster connection.

While the economics, right now, do not appear to favour speeding up broadband, the politics is another matter.

Australia’s politicians are not alone in finding that constituents desire high-speed broadband. It was a plank of Barack Obama’s campaign even if he did not spell out how his goal of 20Mbps access across the US might be achieved. And it should not surprise us that they find an ally in the providers of such services, who see the opportunity to obtain a government subsidy for a commercially risky investment. That itself has led to a larger game that no one seems to be winning.

Joshua Gans is an economics professor at Melbourne Business School. See his 2006 CEDA report available at http://www.mbs.edu/jgans.

4 thoughts on “Broadband in The Age (Day 1)”

  1. “While the economics, right now, do not appear to favour speeding up broadband”

    I agree. Although I believe your use of 40Mbps is incorrect, with the correct speed being 30Mbps, I am having a hard time seeing how to justify such a large expense, $15 billions plus, for a LOWER minimum target and no noticeable benefit for the majority of the population.

    As the internet becomes more content heavy, for example, youtube announcing feature films within the next quarter, as well as itunes, etc, there needs to be an increased focus on reducing the international data-transfer costs, and allowing for larger data allowances.

    You may be easily comfortable with being on the 60Gb plan, but I am distinctly uncomfortable that Telstra charges us $0.15 per Mb excess usage. $150/Gb excess is quite ridiculous, and if you don’t monitor their inaccurate and erratically updating usage meter closely, you could easily receive a several thousand dollar bill, especially if you share the internet at home.

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  2. Not building a fast broadband infrastructure is economically stupid. The difference in cost to build a high speed broadband and the cost to build a low speed broadband is very small. The difference in cost to run high speed communications and to run low speed communications is even smaller.

    Economists are beginning to annoy me because this idea of using price and supply and demand of the use of infrastructure is not the appropriate way to fund the development of infrastructure. The “market” here is the market in supplying the infrastructure and that is the one on which we should concentrate developing. By allowing the market in the possible uses of the infrastructure to drive the construction of the infrastructure through monopoly suppliers is at best short sighted.

    It is the same argument and thought processes that is about to bring us emissions trading, water trading and has brought us money trading and the credit crisis. It is the reason why our public transport systems are in crisis, why our health and education systems are not as efficient or as good as they could be. It is the reason why our digital television is so limited. The list goes on. Economists need to broaden their economic thinking.

    Infrastructure expenditure is NOT best driven by supply and demand of the possible uses of the infrastructure. It is best driven by the market in ways to build the infrastructure so that all can use it. Infrastructure is about community as well as about individuals. It is an argument about solving “the tragedy of the commons” and our current economic approaches are failing to address the issue of the common good versus the individual good.

    Governments have a role in coordinating the rules around infrastructure (let us all drive on the one side of the road, let us make all broadband follow interconnection standards – i.e. defining the common good). Governments should also create the capital (print the money) for infrastructure but in the form of low interest loans to be used specifically for infrastructure. (that is creating some (all) of the $170 billion in new loans we generate each year as low interest loans for building infrastructure).

    The way I would organise broadband infrastructure development would be to allow each of us to own the “last mile” – that is ownership of the connection from the house or person to the communication network and allow each person to be able to get a low interest loan up to some maximum depending on where I lived, to purchase the last mile. Then suppliers can compete to provide me with that last mile. I can of course sell it and get charged rent when I use it. The rules of the loans that I spend on getting my infrastructure is that it must interconnect to the network in ways to allow all others to send me information if I want to receive it.

    With existing communications infrastructure I could buy my last mile from Telstra for the cost plus a margin that Telstra has spent in providing it but the money Telstra receives MUST be spent on building other last mile connections if the money was supplied as a loan. If I sell my last mile and I have not yet paid off my loan then I too must spend the money I receive on building a last mile somewhere.

    We now have a market place with buyers and sellers and let it provide us with the “solution”.

    We also have a solution that will cost the tax payers zip.

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  3. The comment that faster broadband will not deliver serious social, economic and environmental benefits reminds me of the statement of a former Minister for Communications. He argued that the Internet was only for games and pornography!

    Unless Australia is happy to be a broadband banana republic in the future, we need to recognise the shift towards a knowledge and information-centric future and build the infrastructure to support a globally competitive position.

    The “last mile” is the most difficult part of the equation to solve – fix that, and the trunk capacity needed to support high speeds at the edge will fall into place at a fraction of the cost. Mr. Gans doesn’t benefit from his 40 Mbps speed because there are too few users with such connectivity to warrant upgrading backbone capacity. One doesn’t build high-speed autobahns when only 0.001% of the population drive cars capable of more than pedestrian speeds.

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  4. I seem to recall a former Minister for Broadband who commented that the Internet was only for games and pornography. Any suggestion that high speed broadband isn’t a national priority falls into the same basket and will be judged with equal derision in the future.

    If Australia wants the social, economic and environment benefits that broadband can deliver, it needs better infrastructure. The “last mile” is by far the most difficult and expensive part of the network to upgrade – and no-one is going to make the (much smaller) investment in beefing up backbone capacity when there are so few users with last mile connections fast enough to notice the difference. You don’t build 250 km/h autobahns when most of the population are driving clapped out vehicles that struggle to reach 80 km/h.

    In a world where global economies are increasingly information and knowledge centric, lacking world-class network infrastructure will condemn Australia to being a broadband banana republic … and this will increasingly be reflected in waning lifestyles.

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