Assessing the benefits of the NBN

richardhayesMy 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?

How attractive is pricing for the proposed National Broadband Network?

Today the Government released a report by McKinsey and KPMG suggesting it could build a National Broadband Network — without Telstra — for about $43 billion. There are potentially strong benefits of widespread public access to the internet, even if these benefits are hard to add up and may not be realizable today, especially for faster broadband speeds. One of the features highlighted in the new report is open access at a low price, around $30 wholesale for the cheapest tier, which would translate to about $50 retail. In an interview with ABC News Radio this afternoon, I was asked if this really is an attractive price. By today’s standards, it does seem low. However there are two important assumptions being made. First, there will be no cost blowouts beyond the mild scenarios outlined in the report (try not to think of Myki). Second, that $50/month will still be attractive when the network is ready in about a decade. Let us not forget that even over the past few years prices have fallen dramatically. OECD data shows that a broadband plan in Australia costing $130/month in 2005 only cost $70 per month in 2008. Prices are falling across the world and this trend is likely to continue: telecommunications technology (both wired and wireless) is experiencing rapid innovation. I’m not saying that the Government should not proceed but that we should view these projections with a bit of caution.

A separate issue is whether Telstra is likely to partner with the Government on this project. They have to decide by June. While there are potential cost savings involved, I suspect it is unrealistic. Leaving aside past personality issues and legal threats, the reality is that both parties have different objectives. The government wants to offer broad-based access at a low cost, including to non-metropolitan areas that are expensive to serve. Telstra would probably find it profitable to offer fiber in metropolitan areas and at a higher price. Would they really want to go all the way up to serving 93% of the population with fiber as the Government intends? In the report, costs are a lot higher for serving the last 10%. This may matter to voters, and politicans, but to Telstra the remaining 10-20% of the population may be adequately served if they had NextG coverage, or less. Plus there is the matter of Telstra’s existing copper lines to complicate matters…