Economics - General / Oz Politics

The broadband revolution

John Quiggin68 Comments

Like most people, I was surprised by the announcement that the Rudd government proposes to build its own Fibre-To-The-Home network, covering 90 per cent of the population, at an estimated cost of $43 billion. I haven’t seen enough to make an informed judgement, but since this is a blog, I’ll offer some uninformed judgements instead

* Something had to be done about Telstra, and its continuous attempts to hold the country to ransom by virtue of its monopoly ownership of the copper wire network. The plan includes a breakup of Telstra and will, if successful, imply that the new network will largely supplant Telstra’s. The obvious alternative, canvassed here by Paul Kerin, would be to renationalise Telstra, keep what was needed and sell the rest. Politically, that’s probably an even harder sell than the current proposal, but it has some significant attractions

* On the assumption that the network needs a 10 per cent return to cover capital costs and depreciation, it needs revenue of around $4 billion a year, on top of operating costs, say $1 billion a year. That would require 5 million households and small businesses to pay $1000 a year (about $80/month) each. Not beyond the bounds of possibility, given the increasing centrality of the Internet, but unlikely if all that is on offer is a faster version of the existing product

* This implies the need for a “killer app”, and the obvious one, to my mind, is video-telephony/video-conferencing. It can be done, just, with existing technology, but the possibilities would be radically transformed by the advent of near-universal fast broadband.

* The idea of eventual privatisation reflects the government’s residual attachment to the ideas of the past 30 years. But, if this is a success, and if current interventions generate an economic recovery, I doubt that any government will be in a hurry to sell. Of course, if it’s a failure, they’ll be keen to sell, but won’t get much of a price.

* This is clearly a case of ‘picking winners’, but where technology is characterized by huge scale economies, that’s more or less inevitable. Certainly we haven’t done well with the notionally hands-off approach we’ve adopted for the last fifteen years or so.

* The chance of getting this through the current Senate is just about zero. If the government’s popularity holds up, the case for a double dissolution will become steadily stronger over the course of 2009

68 thoughts on “The broadband revolution”

  1. JohnQ: stop with the Howard-era mindset that Telstra could be privatised but somehow controlled by government. It doesn’t even work for the ABC or the Defence Department, and they’re wholly woned. Why would it work for Telstra?

    Telstra’s only course of action is to live up to its own rhetoric and build a faster, better network sooner. Good luck with that. The zero-sum game with government has to stop. Get in there and show us how it’s done, Telstra. If the government overtakes Telstra in taking a decade to fibre-optic the country and impose 2009 technology on 2019, then Telstra does not deserve to survive (as a private, public or any other concern). Twiggy Forrest has more free enterprise spirit in any of his toes than all of Telstra put together and squared.

    At the risk of sounding like Joe Hockey, the Snowy Mountains Scheme was not built on the basis of testable and accurate projections of power usage needs in the second half of the twentieth century. It would have also faced risks from Australia’s enormous coal reserves and the prospect of an Australian nuclear power industry. Similarly, the Sydney Opera House was not built to accommodate the arts industry of 1950s Sydney, when you could have just paid Patrick White to bung on an extension to his home.

    Picking technology winners is not inevitable, as those places where >100mbps are operational (Japan, Korea, Scandinavia) demonstrate.

    Finally, let us pick losers: Terje, Australia is better off for not having tried the ïdeas” that you espouse, just as it is better for not having applied Marxism-Leninism in its undiluted form.

  3. No. 49. Twiggy Forrest is a self-promoting spiv of the first order (I liked the way he popped up at last month’s Victorian fires). If he’s the best example of Aussie entrepreneurial spirit Andrew E. can come up with then this country is in deep doo-doo, 100kbps or not.

  4. The more I read on this topic the more enthusiastic and less worried I become. FTTH networks are now being installed in South America and the Middle East, never mind Scandinavia and Japan. The cost in Paris is 30 euro to 70 euro a month; the latter with full phone and TV included. Elsewhere it is cheaper. See the following for examples:
    http://en.wikipedia.org/wiki/Fiber_to_the_premises_by_country

    This stuff is getting rolled out all over the world. I am beginning to wonder why we are even having a debate.

  5. JQ is correct to suggest 10% return – if the government eventually wishes to sell to private capital without incurring a loss. I am suggesting that the NBN’s existence is justified (in terms of social benefit) if it returns 6%. Social discount rates are typically in the range of 2 to 4% – particularly in light of the global slowdown. It seems unlikely that we are going to recover to the (artificially high debt fuelled) historical growth rates. But perhaps if we observe an ideological paradigm shift from consumption driven growth to productive capacity driven growth, then growth rates may be sustained in the future.

    Competition policy is another matter though. Pitching a price in the marketplace seeking only a 6% return and a large market share is most likely to be termed predatory behaviour by competitors who see their share prices plummeting.

    I still have some reservations about selecting a particular value for depreciation. Perhaps a rate of 2% prime cost with the expectation of a 50 year productive life span? If the venture flops then government will be writing down the investment – beyond the depreciated investment value. If the venture eventually yields a 10% return then surely it will sell at a value based upon expected return.

    Sorry for taking so long to respond Tristan – the dreaded lurgy and time pressures. I characterise this exercise as a comparison between, on the one hand, risk to private capital, and on the other hand, long-term social interest.

  8. I don’t understand this fixation on cost to the consumer, I currently pay $59.95, another $20/$30/$40 per month for the improved spped and applications should not be the problem it is perceived to be by the neo-liberals.

  9. I don’t understand this fixation neo-socialists have with frivolously spending other people money on bandwidth. What if people would prefer to spend the extra money on a night out with the family once a month. Are you happy about denying them that opportunity?

  10. The problem with major projects like this is that given how rapidly the technology is advancing, there is a real risk that it will be redundant by the time it is completed. In that case, vast amounts of taxpayers money will have been wasted.

    At least with spending money on things like roads, rail, ports or water infrastructure, there is less risk that technological advances will render them redundant. Unless someone invents an affordable flying car in the near future, or the cost of air transport plummets.

  12. Ill put $ten on the table now it all comes to nothing much…..and there is no update (as much as I would like to see Telstra ….and Vodaphone…and Optus….segmented into another three^2 parts ..these damn companies will end up with the ability to keep of gouging us.

    Today I am overseas. I spent two hours on the phone with Vodaphone before I left. I programmed my phone with all relevant numbers given to me by them. I was assured it would work in Indonesia and they knew full well I was prepaid cap customer (they even told me to buy a recharge slip before I left…so I did).

    I bought a new phone at airport on way out, transferred my sim to it (I bought the damn thing “unlocked”…was assured was it was connected all data transferred…etc on the spot…promises that all details would remain exactly the same ie global roaming turned oon etc.. it was MY SIM and MY prepaid cap transferred to it after I paid the full price for an “unlocked” phone!!!!!

    Got here to Indonesia. Vodaphone doesnt work despite me being ASSURED AND KNOWING FULL WELL I WAS PREPAID AND FULL WELL WHERE I WAS GOING) and NOTHING WORKS I cant even buy a new sim from a local provider because the phone (MY PHONE) has been “locked” electronically by Vodaphone. (How dare they – this is my phone, not theirs?????)

    The Telecommunications ombudsman is snowed under with complaints like mine.

    Thankyou Vodaphone …you @!#$%!!!&s!! When I get back you owe me for about $30 worth of phone calls to find out you messed me up completely and had nothing you could offer me anyway and no damn service here at all for prepaid customers (NONE).

    Why do we tolerate this abuse of market power?

    My phone is in Denpasar being unlocked as we speak and into is going a very cheap sim…so there!

  14. I live in a large capital city and have no trouble getting by on a 512Kb connection. I don’t feel deprived. Setting a minimum benchmark like 512Kb to 95% of the population and then rolling out fibre services over a longer period of time (a decade or two)
    – Smiley

    You clearly do not use the internet to its full potential. I would not live or move to an area of Australia that was limited to 512k connection. I would not be able to download movies or tv shows. And most importantly from an econmic point of view it would be far too slow for me to be able to work from home. No serious knowledge worker in the 21st century would find 512k an acceptable speed for home broadband for the next 5 to 10 years. It would take me 5 minutes just to download the 20mb requirements document I am currently working to.

    I think the real killer app is going to be hi-def, instantly available, megamultichannel TV and video on demand (though I’ve no doubt videoconferencing and telecommuting will also become more routine).
    – derrida derider

    Absolutely correct. There are websites with hundreds of internet TV stations available for a few dollars a month. The quality is not good enough. We tried internet TV out but even on a 10mb connection the quality was not there and to switch to satellite. 100mb broadband would change that.

    I still have some reservations about selecting a particular value for depreciation. Perhaps a rate of 2% prime cost with the expectation of a 50 year productive life span?
    – David Douglas

    I agree. It seems to me that this is a fundamental question here. How long will we be using this thing? To my mind 50 years is not an unreasonable timeframe to consider when we look at the history of the copper network, and how much in excess of current needs 100mb is.

    The problem with major projects like this is that given how rapidly the technology is advancing, there is a real risk that it will be redundant by the time it is completed. In that case, vast amounts of taxpayers money will have been wasted.
    Monkey’s Uncle

    The problem with this argument is that the technology is not really advancing. You have to be careful not to confuse computing and communications. In terms of fundamental communications technology fibre optic has been the gold standard for 20 or 30 years now. And that’s not likely to change due to fundamental reasons of physics. An engineer can see the constraints on bandwidth at all parts of the electromagnetic spectrum and in 30 years there is yet to emerge even a hypothetical technology that is clearly superior to fibre optic. The only possibility is if some genius comes up with something in quantum technology. Possible, but its yet to be even conceived and would likely take 20 or 30 years to reach commercial readiness even if discovered/invented today.

  15. If the FTTH network came into place, surey Teltra’s prices for exsting copper connections, broadband and phone would come down dramatically to compete. Wouldn’t it be logical to include this in the benefits of the NBN since there is buckley’s of it happening any other way? And how much would that come down? I heard Teltra’s gross margin is something like 60%. If that was brough down to 30% then we are looking at a reduction in costs of perhaps $10 to $20 a month for most existing broadband connections in the country.

  16. Part of the reason Telstra has delayed FFTN and FTTH is to do with the simple concept of retaining its copper-wire landline for as long as they can.
    Have a look in their annual reports to see just how big landline/phone rental + calls are. While mobile is slowly encroaching, the ADSL needs a landline for which Telstra may charge access.

    As for bandwidth…I’m about to download the latest R and all of its packages, about 1.2GB of data. It will take an age because I don’t have real data speeds.

  17. I would not be able to download movies or tv shows.

    swio, as I said I don’t feel deprived. I get so much more entertainment from books, blogs and an occasional clip from The Daily Show or Colbert. I have no desire to emulate “the most entertainted least informed people on the planet”.

  18. The argument simply doesn’t stand up. If fibre to the home could be provided for a cost of just $50 pm, why aren’t telcos lining up to do it now?

    Also, there has been no mention of download limits or costs. Are we to assume that the $50pm model includes unlimited downloads?

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