The NBN needs emergency triage

Now that the election is done and sorted and there isn’t a hung parliament, it is time for Australia to get on to the job of urgent policy-making. There are lots of areas in need of help but I am going to focus here on one close to my heart: broadband.

By any measure, broadband policy in Australia has been an abject failure. Despite brief moments of hope, we moved from a regulatory morass dominated by a private monopoly to a set of deals and politics dominated by a government monopoly. No one advocated for this but in the reality of political mess that is what happened. As a result, broadband has not improved in almost a decade. Indeed, much of regular internet use by ordinary Australians has moved to wireless.

I know the Prime Minister agrees with me about this because he and I had a public conversation on it in 2011 before the Coalition was in government. You can read the transcript here. But I suspect that political truths have prevented progress. Thus, the first course of action is to cut out those political truths.

The first one is that one size cannot fit all in broadband. There is variation in demand. There is variation in the costs of supply. That means setting equal terms in urban and rural areas won’t cut it. It is far better to explicitly subsidise than cross-subsidise. Full stop. But because it takes time, a period of unequal pricing and quality is necessary. Any solution that tries to do otherwise will only continue the morass.

The second one is that the NBN’s active role needs to be diminished. It needs to retreat to the backbone. I am not sure what architectural requirements would be needed but taking any customer facing role of the NBN (they may not be any but it is hard to tell from the media reporting) and divesting it — and yes privatising it — is probably the right way to go. If you don’t want privatisation, then split it up into local areas and hand it over to local government. Broadband is not a national public good it is a local one. It shares more in common with garbage collection than defense. Treat it that way.

The third is that it then needs a clear open access regime. We need to encourage retail competition at the local level. Full stop.

The fourth thing is that we need to diminish any sort of exclusivity the NBN has. Any sort. Mobile should be able to compete with it fully. Other wired providers should be able to build over the top of it.

The fifth thing is that a temporary sacrifice in local environmental regulations on wires not in the ground needs to be nationally suspended. The idea is to allow these unsightly things for 5 years on the condition that they be then grounded. Sorry. That is what the rest of the world has done. If local governments want to pay to speed up grounding them then fine. It should not slow down any rollouts.

The final thing is a big one. After all these years we have learned that the biggest broadband use is video consumption mostly for private purposes. The wholesale pricing model and also retail ones will need to switch to something that ensures that those consumers using the most video have to pay more. That means no ‘under the count’ options. You will find them willing. The only thing is that means broadband caps as a default. That sucks — I know — I pay to have mine removed but the economics require it.

If it is wanted to make this more politically compatible then the basic free account is something that can be offered. That will open up the notion of broadband as a citizen right.

[Updated to reflect user comments and clarifications]

And another thing … on broadband and Telstra

Kwanghui Lim posted a link to this post from Cloudfare on what they pay for transit around the world. As you will see from this table, Australia is the most expensive region — by a long, long way.

And the reason:

Australia is the most expensive region in which we operate, but for an interesting reason. We peer with virtually every ISP in the region except one: Telstra. Telstra, which controls approximately 50% of the market, and was traditionally the monopoly telecom provider, charges some of the highest transit pricing in the world — 20x the benchmark ($200/Mbps). Given that we are able to peer approximately half of our traffic, the effective bandwidth benchmark price is $100/Mbps. 

 To give you some sense of how out-of-whack Australia is, at CloudFlare we pay about as much every month for bandwidth to serve all of Europe as we do to for Australia. That’s in spite of the fact that approximately 33x the number of people live in Europe (750 million) versus Australia (22 million). 

 If Australians wonder why Internet and many other services are more expensive in their country than anywhere else in the world they need only look to Telstra. What’s interesting is that Telstra maintains their high pricing even if only delivering traffic inside the country. Given that Australia is one large land mass with relatively concentrated population centers, it’s difficult to justify the pricing based on anything other than Telstra’s market power. In regions like North America where there is increasing consolidation of networks, Australia’s experience with Telstra provides a cautionary tale

Suffice it to say, there is something outrageous going on here. At some point, this is going to bit Australia back and it won’t be pretty. This is clearly an issue that Malcolm Turnbull should look into as soon as possible.

Behold! The NBN Cost-Benefit Analysis

After slamming the last Government for not doing a cost-benefit analysis on the NBN, Malcolm Turnbull has produced the goods. My view on cost-benefit analysis remains unchanged: if you have already decided what to do, a cost-benefit analysis is of no help except for vindication.

Nonetheless, there is another unintended consequence of doing one: the Minister in charge of it all has to explain it. Well I have to admit that I was impressed by Malcolm Turnbull’s “on the fly” professorial treatment at the Guardian. There aren’t many politicians who can explain optimisation while at the same time using the notion of ‘marginal utility’ correctly but there you have it.

What is nice about the cost-benefit structure is that it grounds the debate and makes assumptions clearer. For instance, Turnbull argues that on the supply-side costs of middle of the road technologies (that support fibre to the node) are falling (or improving in their quality) at a faster rate than technologies that support fibre to the premises. I’m not sure whether that is the case but if it is, then that is support for fibre to the node. Turnbull also does not assume that technology is changing the ‘utility’ function that drives the demand for broadband. However, as many will argue, this assumption would, based on experience, not be valid. What the analysis forces people to do, therefore, is explain precisely how demand conditions are changing rather than ‘this is more and I want more.”

But let’s turn to the report itself. I’ve skimmed it because, frankly, that is all the exercise deserves (given that it won’t impact decision-making and all). The first odd bit is that the benefits and costs are not relative to say not having done anything years ago but relative to what they are intending to do. That means that if that is the best, it will have the highest ‘net benefit relative to the reference case.’ But that doesn’t mean that it has a positive net benefit overall. To be sure, as a matter of economic decision-making, net benefits relative to the status quo is a good approach but in a document like this it triggers some scepticism.

Moving on, the report is useful in that it provides some assumption testing. For instance, the report concludes that at the current level of willingness to pay (WTP) for broadband (I’ll return to how this is measured below) then the current government policy has higher net benefits than the FTTP policy of the previous government. But as Turnbull’s little lecture tells us, if WTP grows then the optimum will shift. The report says that, in a decade’s time, the optimum will shift is WTP is 250% higher than it is today (i.e., it grows at about 13% per annum). Now, let’s think about what that means. It does not mean that people use two and a half times more broadband than they do today. Instead, it means that their WTP for very high speed broadband will be two and a half times more than today. 

To get a sense of that, consider what the equivalent thing would have been from the perspective of 2004. There was no YouTube so the demand for broadband speeds of today would have been driven by YouTube. My guess is that (based on current Telstra broadband prices) that WTP of the marginal consumer increased from close to zero to over $50 per month. Thus, the WTP growth criteria was easily met which is why we have high speed cable running past most urban households. The point is that it is not that hard to imagine a new product coming out that does, in fact, drive WTP growth of the order that changes the optimum network. (Virtual reality comes to mind as a possibility but, the difficulty here is that it is hard to tell). That said, the fact that 6 years ago, a government believed that demand in four years would be high enough to justify FTTP looks somewhat silly.

On to WTP itself. The report uses ‘choice modelling.’ This is a standard way of trying to extract consumer willingness to pay. The issue faced is that when it comes to some products, consumers may not fully understand what they are payiing for. So the methodology includes some random sample who are given a lesson in broadband speeds and capabilities. This allows them to derive a WTP estimate for broadband today. This is a much better approach than the craziness that we have seen in the past on broadband in Australia and, it looks pretty reliable as far as these things go. 

The problem is that (a) it cannot possibly take into account new products and (b) it is based on private values. The first problem is endemic to these exercises. As I pointed out, an analysis in 2004, would have likely got the optimal network spectacularly wrong and what the report does not really grapple with is that it may be wrong in the same way again in 2014. That said, we move beyond our ability to do objective analysis when we get into technological forecasting but it is worth emphasising that this issue doesn’t go away.

The second problem is more critical. We have to remember that this is largely a public investment. The relative comparator is that the investment is all private. That scenario is not really investigated (as far as I can see) and so it is surely the case that we want the public benefits from this government policy to be enumerated and not simply a calculation of private ones. I guess that is too much to expect in this world but it still remains that the NBN is a massive public outlay mostly benefiting the rich. If it could bring real competition that would diffuse the benefits to the wider population but I am yet to see a plan as to how that is going to emerge.

How fast is the NBN exposes how bad the policy debate is

There is a new site doing the rounds on Facebook: howfastisthenbn.com.au. It comes the ALP and Coalition’s NBN plans and surprise-surprise, the ALP’s one is much faster.

So here are the activities that are compared:

  • uploading wedding photos to Facebook
  • Downloading Game of Thrones
  • Uploading a new puppy video to YouTube
  • Syncing engineering designs with Dropbox

The biggest public expenditure in Australia’s recent history is going to this. Please explain how any of these are remotely a public good. And yes I am including the engineering designs here. Go with the Coalition and your business is set back 8 minutes!

For the Game of Thrones one it isn’t even a private good. With ALP you can download the whole thing in 16 seconds (actually, I’m pretty sure you can’t) but with the Coalition, it takes 10 minutes. But here is the point, if you download from iTunes you can start watching right away. In other words you get NO BENEFIT from the ALP NBN. Is it no wonder we can’t find people to privately pay for this.

And on the uploading ones that can be cured tomorrow by not limiting upload limits over DSL; that is, removing the A. The whole limited upload deal demonstrates why the current proposals remain in the dark ages.

But the whole exercise is enough to convince ourselves that neither plan is worth it. Now, I don’t quite think that but I do think that the focus on speed is ludicrous.

NBN for Small Business

From The Age, the NBN will be getting to 1Gbps. That’s good but …

“The average person who does regular internet activities is probably not going to notice much difference today,” Professor Tucker said. ”Where I think it will make a difference is in small businesses.”

Independent telecommunications analyst Paul Budde said right now only about 5 per cent of people, mainly small businesses, would be able to make use of the increased speed.

This from top supporters of the current NBN.

So why not just do FTTH for small businesses? Why does it have to be rolled out at public cost to everyone?

 

The usual Broadband cleanup

ABC Online has shut down comments on my broadband post before I could comment. As usual, there is so much mess there that I need to clarify things. So I’ll do it here.

  1. I am a Labor voter and will be so in the current election.
  2. I can do that because I am an Australian citizen. I just happen to live in Canada.
  3. Living in Canada is not a bad thing, it gives me a different perspective on some issues.
  4. One example of that is that broadband delivered over cable or 4G wireless is fast; much faster than what most have currently in Australia.
  5. I did not endorse the Coalition broadband plan. There aren’t enough details and I made a mistake endorsing a broadband plan before when the details weren’t secure.
  6. But it does move the debate forward which they didn’t do in the last election when they didn’t have a broadband policy other than to have no real government involvement.
  7. The key element of moving that debate forward was re-opening up infrastructure based competition from cable and wireless which the government is shutting down.
  8. They also put on the table that it is economical not to try and give everyone precisely the same service, and in the shadows, different prices.
  9. Neither party are doing what I would like to see and offer a free broadband service at 5-10Mbps. That would be an actual public good because it would allow government services to go on line.
  10. Both policies are horribly regressive. Massive expenditure on what is primarily a private good as evidence from Korea has demonstrated. It is, frankly, shameful.
  11. If it were done properly we would have money to spend on other things, for instance, improving the horrible way in which our schools are preparing our children for the future.

Broadband shouldn’t be one size fits all

[This post was published on ABC Online on 12th April 2013].

With the Coalition’s alternative national broadband plan, Australia is finally focusing on a real issue – that there cannot be a ‘one size fits all’ approach and that competition has a role, writes Joshua Gans.

This week I will be speaking at a conference in Kansas City. Interestingly, the session I am participating in will be chaired by the mayor, Sly James. This is not usual for an economics conference, but when you see that also speaking at that session is Google’s chief economist, Hal Varian, it makes sense. This is because Kansas City was the first winner of Google’s contest to pick a city to install a fibre-to-the-home broadband network. And Mayor James is very pleased to be associated with Google.

A couple of years ago, localities all across the US were falling over themselves to get first in line for Google’s investment. Topeka, Kansas even renamed itself “Google”. One thing was for sure: thanks to competition, Google would face no local regulations in the way of rolling out Google Fibre.

The story of Google Fibre has important lessons for the economics of broadband. The most important element is that Google recognised that broadband is a local public good. When you install a more advanced broadband infrastructure, you cannot get the full benefits of it unless that installation takes place in local areas.

But it is that “last mile” which is both very costly and also has the greatest variation in costs from locality to locality. But, as Kansas City realised, each time you wire a locality, it is the local residents and businesses that benefit the most. In other words, as public benefits go, it has more in common with garbage collection and parks than it does with national defence.

The Australian Government, however, has gone the national route in broadband. That means that it wants very close to a ‘one size fits all’ model. Everyone gets fibre to their home. Everyone pays the same price. And no one gets more choices than another. Now, the economics have not allowed that goal – even the NBN rules this out for outlying regions – but nevertheless that is the aim.

For years, the Coalition resisted that. They avoided having a national approach and it cost them the last election. (Technically, everything cost them the last election). This week, that changed. The Coalition will now build a national network. It will be for everyone. And the prices will be the same. But they have abandoned the notion that everyone will get the same service. In other words, the economics will rear its head, and in most areas, the government will only build out fibre to the node.

That is actually a familiar policy; indeed, it was the policy that got Labor elected in 2007. But as Labor proposed it, it was insane. A government consortium would build the network to the node and then, effectively, Telstra would get the last bit into people’s homes. A monopoly is bad but two in sequence is worse. It was cheap in terms of capital, but expensive in that the capital would be effectively useless.

I wrote as much in 2008 when I argued for Plan B: for the government to build itself a national fibre-to-the-home network. Six months later, that is precisely what they proposed to do.

They did not, however, do what I had called for. I wanted the government network to be a competitor – to drive Telstra and others to enhance their network, boost up the cable network, and push fixed-line telephony costs to zero. The government could then subsidise heavily the areas where broadband was costly while relying on an open access model with private investment to cater to the last line.

I was basing this idea on a model proposed by Google’s Derek Slater and a collaborator, Tim Wu. Basically, the government would not so much build a network as cut through all the regulations and market power that were stopping a network from being built. Do it right, and it would be economical and move Australia forward. You would design a broadband market.

We know what happened. We got a Telstra break-up (which is a plus) but we ended up with an expensive old-style government monopoly in its place (a definite minus). And the prices people will pay will reflect that; not to mention the slow pace of the broadband roll-out.

Contrast this with Google Fibre. For $120 per month, you get everything. Internet, television, a digital video recorder and telephony. They even throw in a tablet. And you get it without download limits and 1 gigabit per second (10 times the NBN’s proposed rate) for both uploads and downloads.

The top of the line option from Google blows the NBN’s $90 per month out of the water. If you just want the internet you have two options: a $70 per month option without TV or a $0 per month option. The last one is interesting. It is slower (5Mbps) and involves a once-off fee of $300. If the Government was acting like a public good provider and actually like a Labor government, it would have a free option too. Then it could compel people to use it for government services and actually start saving money.

The Coalition, in their new embrace of national broadband, have not given us lots of details. Then again, neither did the Government. They hope to bring the retail broadband price below $70 per month, but you are going to get slower speeds. That doesn’t sound like a shiny future, so you can almost wonder why they are bothering.

As you read a little more carefully, there are glimmers of hope. With the Government having done the job of quashing Telstra’s long-term market power, the Coalition is looking to bring back competition. Rather than prohibiting cable providers from offering broadband, they are bring that back.

From my personal experience in Canada, you’ll get speeds in excess of 100Mbps with that alone. And moreover, you’ll get it sooner. Importantly, they will free up mobile competition because while the engineers don’t like wireless, real people seem to and we don’t want to cut that option off to preserve government monopoly profits.

The broadband debate in Australia has moved on. Finally, it seems that it will focus on a real issue – that there cannot be a ‘one size fits all’ approach and that competition has a role. None of this is at the level that would truly please an economist like myself. But for the moment, we should all appreciate a positive direction.

Joshua Gans holds the Skoll Chair in Innovation and Entrepreneurship at the University of Toronto and is a Research Fellow at the Center for Digital Business at MIT. He blogs on these issues at digitopoly.org. View his full profile here.