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.