My colleague Richard Hayes is working on a project to analyze various methodologies that could be used for assessing the benefits of a national broadband network (a companion project exists on the cost side). Richard recently described key aspects of his project on ZdNet’s Twisted Wire program.
The main thing I’ve learnt from that podcast is that an accurate and precise measure of the NBN’s benefits will be difficult to calculate. There are two constraints, the first being the availability of data and the second being our difficulty in estimating externalities across economic sectors. For example, one approach would be to estimate a discrete choice model, asking people to choose between hypothetical bundles of broadband options. This would provide an estimate of their willingness to pay for specific characteristics. The approach would require data that does not currently exist, and even if such data were obtained (e.g., through surveys), it is unclear people can accurately assess their utility for some broadband-related goods/services that do not yet exist. A broader approach involves using a Computable General Equilibrium model which would yield an economy-wide estimate of the NBN’s impact on activity, but is especially difficult to implement where there are lots of interdependencies (such as with broadband). I also learned from the podcast that some benefits are easier to quantify than others, especially those that are already in use by large existing organizations.
It’s not entirely clear what this implies. However, it seems to me we can learn from parallel situations of how R&D projects are managed within large firms. Perhaps, we should stop looking at the NBN as an all-or-nothing investment. It is perhaps not realistic to do a complete analysis and match incremental costs to incremental benefits ex-ante. However, by breaking the project up into stages (geographically or by some other criteria), one could postpone the decision of whether to do later stages until additional information is obtained. Consider the example of Google’s decision to build a fiber broadband network for communities in the US. It would be difficult for Google to value the overall benefits of this network ex-ante. But that hasn’t stopped it from trying out this “experiment” with a few communities initially with the possibility of scaling up later. Shouldn’t we take a similar approach with the NBN?
Core Economics 
Anecdotally, many people I discuss the subject of broadband capacity with, appear to value the download limit more than the speed. I suspect many (a majority?) broadband purchasers may well be indifferent to broadband speed beyond a certain threshold as long as they could download without penalty.
Another factor is the way the government has framed the offer – guaranteeing universal access to download speeds that may well be above what most people would pay for out of their own pockets, or will ever use, but are quite happy to have the service if it is subsidized by the population at large.
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>> But that hasn’t stopped it from trying out this “experiment” with a few communities initially with the possibility of scaling up later. Shouldn’t we take a similar approach with the NBN?
No, because I think there’s a raft of significant benefits that will only be on the table with a ubquity of superfast broadband access at a national level.
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Joshua Gans pointed out in a paper for CEDA several years ago that broadband is a local-level infrastructure. Much of the intelligent scepticism about the NBN springs from this observation.
Most people think a ‘national broadband network’ is something you either have or don’t have, like a bridge. In fact, we have a national broadband network right now.
The really obvious starting points for any assessment of faster and more uniform broadband would be to ask: What benefits have accrued between areas of Australia that already have fast broadband, such as universities and CBDs? What benefits have accrued in places like Seoul and Tokyo, where fast broadband is rolled out to large sections of the population?
As William Gibson observed, the future is already here; it’s just unevenly distributed.
As an aside, there was a decent-looking study floating around that suggested most of the economic benefits of broadband came from a combination of reasonable speed (anything above 128kbps) and always-on capability. Does anyone have a link to this?
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The Bureau of Transport and Communication Economics wrote a paper in 1996, Occasional Paper 111 on demand for the then new HFC network…
TITLE: Residential demand for access to broadband networks: An empirical investigation.
This study provides medium-term econometric estimates of residential demand for broadband network access and service subscription.
Unfortunately no longer available online, since BIRTRE as they are now no longer research communications.
See copy in NLA: http://catalogue.nla.gov.au/Record/2773675
See also:
http://www.btre.gov.au/Info.aspx?NodeId=135
The following occasional papers are no longer available in hard copy or electronic form. These were Communications research publications. BTRE no longer conducts research in the Communications field.
Occasional paper 114, Occasional paper 113, Occasional paper 112, Occasional paper 111, Occasional paper 109, Occasional paper 105, Occasional paper 104 and Occasional paper 102
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This weekend’s Australian has some preliminary information on the NBN take-up rate in Tasmania: approx. 10% (in three towns) have chosen the $100/month service over existing cheaper alternatives. The number of people involved is small but I’d say it’s early evidence of the value – or lack thereof – placed on the NBN’s offering.
It will be interesting to observe the take-up rates in urban Melbourne and Sydney assuming that the price offered is similar and the roll-out isn’t biased with “opt-out” rules, i.e. having to choose not to take up the offer.
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How can you hope to use WtP as a good measure when – basically the uncertainty about what the NBN will generate will greatly effect it’s appeal.
It’s like asking someone if they want to buy a share in super highways before knowing what vehicles you can use.
Just like we don’t know the benefits, the average punter will no either. It’s still a matter of faith.
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Tristan raises a good point.
Not a lot of need for the NBN if a vague and cancerous censorship regime goes with it.
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@Josh, how do you calculate the benefits of ubiquitous high-speed broadband from a small trial site? I’m curious, because I can’t see any of the really big benefits kicking in until there’s a pretty large userbase (for commercial reasons for commercial applications, and for equity reasons for pubic applications). @DP, you should know better than to take your information from the NBN’s biggest rival, Murdoch. Initial take up rates for a connection point are lower in Tasmania than in any of the mainland sites. This is why the Australian is so fixated on them – they are keen for a network that renders Foxtel obsolete (in the medium term) to fail. Also, an NBN connection in Tasmania does not cost $100/month. The smallest amount of research can confirm this. In particular, you should look up Internode and Exetel’s pricing. Anyway, Access Economics calculated a fibre-to-the-node NBN as providing a 1-1.5% boost to GDP, and while baulking at estimating the benefit for fibre-to-the-home, estimated it would be higher than that by some unknown amount. A 1,5% increase in tax receipts plus whatever income NBNco make as a wholesaler would seem to very quickly offer a return on a $26b spend. The increment in tax receipts alone is likely to be in the $3-5b p.a. range. It would seem that the viability of the NBN is not really in question when the government (who reap most of the benefit through increased tax revenue) is the builder. I’d be interested, Josh, if you, or Mal Turnbull, or anyone else, could offer a set of assumptions for build cost, annual wholesale income, annual maintenance cost, annual copper maintenance cost saved, and likely increment to GDP that are a) credible, and b) show the NBN as non-viable. Take a look at the NBN criticism or questioning that’s out there, this blog included. When there is all this questioning of viability by people who NEVER put out ANY calculation at all to support their doubts, I suspect a political motive. If you have a reason to doubt the viability of the NBN, then just publish it in the form: My estimate of the revenues is $X and the costs $Y and see if the assumptions that lead to X and Y stand up to scrutiny.
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