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
John Quiggin 
Prof Q, do you see this proposal as flagging a major shift in National Competition Policy?
Xeno would see this as all right I would have thought. Fielding wouldn’t have a clue, and couldn’t be predicted.
I think this will be very popular with the punters, get a few more triggers and I’d love to see a DD election. Couldn’t see kevvie doing it though, not ever.
Wilful, the very boldness of this measure suggests a risk-taking side we haven’t seen much of.
PM, I haven’t thought it through, but I’d say we are likely to see a revision of NCP thinking about natural monopoly assets.
Talk about confused outcomes.
Try to ban porn (mandatory internet filtering) in combination with fibre-to-home broadband. With the filtering there just won’t be enough demand….
Prof Q, am genuinely interested in your views about this.
Prof. Quiggan. With respect to the point”:
“This implies the need for a “killer app”, and the obvious one, to my mind, is video-telephony/video-conferencing.”
If you want a good background read on the history of fibre optics up to the about 4 or 5 years ago, I can recommend Jeff Hecht’s book from the excellent Sloan Technology series.
http://www.sff.net/people/Jeff.Hecht/City.html
In this book the author make the point that AT&T backed wave guided microwave trunk lines running video phones as the basis for the corporations future growth for the second half of the last century. Long distance wave guides turned out to be a failure and there was never any demand for video phones. In the end optic fibre provided the high bandwidth long distance connectivity for communication networks and the internet became the killer application that used it.
I suspect entertainment such as video on demand would be the application that will cause households to spend $1000 pa on their broadband connection. But who knows. Demand for new technology is difficult to predict. (Just ask AT&T (or what is left of the corporation.).
If instead of applying a market discount rate of 7 to 10% real, we choose to apply a social discount rate of 4% to this measure, then the total revenues may need only be $3 trillion – equating to $50 per month per household.
In my case I presently pay $109 per month for a bundle including ADSL2+ 25gbit and free local and STD calls. If bundles such as these could be provided at an ever cheaper real cost, factoring in the declining cost of the end user technology and a little confidence in the continued uptake of this technology, I suggest that it’s not hard to envisage sufficient uptake and positive returns to private investment within five years.
Assuming the scenario I have just outlined, real returns may, in time, be expected to approach levels attractive to private investment.
1. One of the only blessings in the present economic climate is an increasing consensus that government has a greater role to play.
2. Picking winners is all about identifying the external benefits of a particular investment. I shan’t even begin to list them because I will be here all day.
It’s lamentable that neoliberal sentiment still relegates these two goals to obscurity – and equates project viability only with the returns to private investment. Market failure is the resulting lament of the social democrat. From education to communication we are all too often short sold on vision for the future – perhaps the tide is turning.
Am I being naive and cynical to think that this will allow them to more easily filter the net??
DD, I’m not assuming a market discount rate, but I am taking account of depreciation (only a guess at the rate of course).
I’m not sure why you don’t think it will get through the Senate. I haven’t heard the Greens response, but I would think we would broadly support it, perhaps with a few tweeks. Xenophon and Fielding are probably 50/50 each, so that gives a one in four chance of getting it through. Hardly zero.
veltyen #1:
This new broadband network is much broader in scope than a world wide web connection. It is a total replacement for the current communication infrastructure. That means broadcast & cable TV/Radio, video on demand, fixed telephony and much more. (Who know what creative application will appear once the bandwidth is made available.) I suspect it will be applications other than the WWW that household will justify spending their domestic funds on connecting to the network.
However you are correct to point out that policing the network will be an issue. Surely you don’t expect it to become a lawless zone where anything goes?
David – I’m not sure of what you’re suggesting…. What I want to know is this – if the project was fulling public-owned – what kind of debt servicing costs would be necessary – and over how long?
Also: Assume the project was fully financed through bonds and public borrowing… How much would we be looking at per year… And over what timeframe? What kind of return would the bondholders be looking at?
And if the govt – apart from this – ran the affair ‘not-for-profit’ – with subsidies for low income housholds – what sort of costs for service would we be looking at then?
I’m trying to get the facts straight for my own blog – so help is appreciated.
I am intrigued by the hypothesis promoted by Paul Kirin in the article linked to by the professor.
Can anyone else verify that Kirin’s back of the envelope calculations are accurate or feasible?
Of course this whole schmozzle only goes to prove what an absolute dog’s breakfast the privatization of Telstra has been from day one!
My personal thoughts – as one who has enjoyed first-hand the benefits of the highly subsidized South Korean approach to building 21st century telecommunications infrastructure for the last nine years – are: that FTTN is a waste of time; that FTTH may also be a waste of time and a sizeable waste of money, but at least it will kick Ausblogistan from the 19th century into the 21st century of telecommunications services, and may even create/save a job or two!
As far as I can tell, every other developed nation on earth – and some less developed ones as well – has already built, or is half-way to building such a network. Why are we so hopeless/incompetent?
Sorry, that’s meant to be Kerin, not Kirin!
“The chance of getting this through the current Senate is just about zero.”
On the contrary, it will be easy to get this through the Senate. It will just be a matter of turning up the rural and regional pork dial sufficiently to get the support of the Nationals, which shouldn’t be hard. Barnaby Joyce and Fiona Nash have already said it’s a good idea because it’s their idea.
Is it good policy to get 100MB/s broadband to Oodnadatta with massive subsidies? Of course not, but that is what will happen.
Tristan, I am looking at it purely from the perspective of the social discount rate – and the net social benefit. High capital cost projects often result in barriers to entry – this is why the government is attempting the project in the first place. I am suggesting that with rising revenues, in time the return on investment will yield a dividend.
JQ, I suppose I’m trying to be optimistic and temporarily defer depreciation in favour of asset appreciation as a result of rising revenues.
On what basis would we depreciate this asset from day one? An eventual need for total replacement (I would hope expenditure on maintenance would maintain the asset value) – or, on the basis of eventual technological redundancy. In the latter case, the hypothetical replacement technology can be viewed as a risk to the asset value. Presumably this risk increases with time suggesting the depreciation rate should also do so. I confess though that these thoughts on depreciation are given in the absence of knowledge concerning the rate at which such infrastructure might be depreciated.
I use the Internet for work and at home for music and catching up on shows with the excellent iView of the ABC. I also have naked DSL with a VOIP phone.
I realise that not everyone has internet speeds similar to mine (6MB) however my internet is quite fast enough for what I do. I fail to see how my world will be transformed by faster internet.
The problem is not the internet speeds but our incredibly backward telecommunications companies with their 19th century ideas.
Why cannot I download a 7 day Electronic Program Guide (EPG) free rather than using ICE TV that costs. Just about every other country has a free EPG. Why is Seven and Nine suing ICE TV for copywrite for the public domain EPG that they publish? Why is Seven and the movie industry suing IINet for containing downloaded movies?
What is the point of faster internet if it is filtered and there is no content on there to look at?
I would rather the 46 billion be spent on Health Care or public schooling.
To be perfectly honest we have an epidemic of kids that spend their lives on the internet communicating and being bullied by mobile phone. My chief task at the moment is limiting my kids time on the internet and making sure that they are safe when they do go on.
Maybe the 46 billion would also be better spent educating parents in computers so that they can properly monitor their children rather than the pathetic filter idea of the government. Because I am in IT and work with computers everyday for my job I can block sites and make sure my kids are safe. I can also closely monitor what they do as I know what I am doing. I shudder to think of Joe Average parent struggling to cope with kids far more internet savvy than them.
We don’t need faster internet we need more informed people using the internet we have.
“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”
.
I’m not sure why you think that is unlikely — at present if you want to have a phone ($30 p/month) and a slowish internet connection ($40 p/month), it already costs you that amount (assuming that most people cannot ditch their home phones due to network constraints but would with the new connection). Since, according to ABS stats of 2008, there are already over 4 million people with broadband, I assume that the market is almost already there.
David; sorry if I don’t understand – but does ‘social discount rate of 4%’ mean there will be a 4% return on investment – hence an average of ony $50;/month for a connection? John – if you’re reading – is this realistic. I’m more of a generalist than an economist – so I have difficulty understanding sometimes.
And again – assuming the enterprise was won ‘not for profit’ – just to pay costs – what would the debt servicing fees be like – and how long would they last?
And are cross subsidies for disadvantaged individuals and households workable? (may less than $50/month for these people)
see my entry on these issues at Left Focus (search Google) I’m looking to update my entry because on still not clear on a lot of all this.
Sorry about this – can anyone help? My blog ‘Left Focus’ is not turning up on Google again. (except indirectly) Does anyone know how to get ahold of Google to fix this? I’ve already tried several times in the past – only for the listing to disappear again.
I only noticed this after leaving the prior message. I really don’t know what to do.
sincerely,
Tristan
Conrad, my concern is that the NBN has to take something pretty close to 100 per cent market share, against competition from ADSL, wireless and so on, while maintaining roughly the current price. It seems to me that will require more than a speed-up.
Tristan, my calculation is, in essence on a not-for-profit basis where the return to capital simply covers debt service. Responding to DD, you can’t ignore depreciation if you want the network to be a viable long-term investment.
To everyone, including me, let’s remember that these are back-of-the-envelope estimates that could easily be out by a factor of 2, and maybe more.
One of the first sentences of justification I heard was the possibility of using the NBN to deliver healthcare services – think video-conferencing, diagnosis via video link, mental health consultations, etc. This has got to be so much cheaper than educating a lot more GPs to go and sit in offices in Oodnadatta, etc.
What other services could we deliver down the fibre? Anything that presently is delivered over a desk and recorded – oh, surprise, surprise, on the office computer.
The industry analysis so far of the NBN has been very negative which strengthens teltras position enormously – not only do they own the copper they own the exchanges and ducts and whilst they have to allow access they are the landlord and rent has to be paid – I believe that telstra instigated changes to exchanges in the ACT have left the competition floundering.
“not-for-profit basis”
The government has said they are looking for private equity investors from the beginning. They will want to earn a quid from it.
If John’s comments – re: his estimates assuming ‘not for profit’ mode of operation – it makes it all the more important that this project be fully financed by the government…
I’d be interested in hearing more from David Douglas on how his alternative works – given that John has suggested $80/month at a ‘not for profit’ rate..
And what of a ‘Communicatons Levy’ to provide debt-servicing costs?
As a wholesale operation, they may sell gobs of optic pipe to, oh, I dunno, Health operations such as diagnostics and path, and have applications like remote real-time MRI results while the patient is still on the bench. Then there is the convergence of media technologies; and the use of flat wall screens for videophoning in HD, movie-streaming and TV-channels customised for the individual viewer (good for kids, good for adults). Continuous dataflows from real-time metering of utilities, high video-content interactive web, and so on.
My guess is that big application builders, such as Microslosh, will create bolder webapps with 3D-like full-motion screen graphics and so on. Guaranteed to suck up 100Mbps or more. Once we have critical mass of access-ready homes, the rest will follow *if* the price is right. After the $70+ billion Telstra debacle, I fail to see how the current government could do worse.
1) I doubt the nationals will vote against this, it is what rural Australia needs. Go no further than distance education to see the advantages, add it medical applications. No we don’t 100mbits but we do get 12 and that is good enough. This will be the nail in the coalition and if not the National party. It will get through.
2) Digital TV eat you heart out.
3) No it will be harder to filter the net, the great Australian net filter just got 10 times bigger at a minimum.
4) Laying the fibre is the major cost, it lasts and you speed it up buy putting new stuff on the ends.
5) Using a 10% discount rate is just crazy, the amounts are large enough to work out a sensible rate.
6) Every one is on about global warming, jets are a problem, making video conferencing must cut down on travel.
7) We are in a economic downturn we need something to pump prime, love to see someone come up with a better idea for something that bring benefit to all.
To Rog # 24
As I understand the situation with the current level of technology, telephone exchanges are essentially obsolete. There only needs to be 3 or 4 “super” switches for the whole of the country. The new fibre network will bypass the existing Telstra exchanges.
Whether the new network needs access to existing Telstra Duct/Conduits is a different story. I suspect the ability to access existing Telsta ducts at a reasonable cost will significantly reduce the cost of the network.
Another variable, if Rudd acts to break up TLS, would be the army of very pissed off TLS shareholders – deprived of both their stakeholding and their dividend (which is quite good)
Probably as good a thing to come out of the Rudd govt as any. Stimulus + infrastructure + forward looking employment opportunities and tech development. A welcome update of the preferred option of most people in IT when the dual cable roll-out dud was implemented – I recall that most everyone wanted govt backbone plus private services.
And a great contrast to the Howard years of infrastructure neglect. If Rudd delivers on higher education (massive increases in full time academics) I might even change my vote.
When did we every try hands off? We seem to have had endless rules and rule changes about carriers accessing other carriers infrastructure at regulated prices. It has been a fiasco. We did two pro market things in the last 20 years.
1. Introduced competition.
2. Privatised Telstra.
Beyond that we have had more regulation than ever.
The announcement of the NBN means that private Telco investment is now going to nose dive.
In terms of the senate the Greens have said that the NBN will reduce greenhouse emissions so they are in favour of it.
A cynic would say, not that I am one of course .. nice to have a broadband network for nearly everyone, but how will it work if there is no electricity?
Anphetamine fueled hamsters on a wheel perhaps?
Nice idea, but given all the other issues Austrlia faces, e.g.:
– Water, going, going .. gone?
– Food, ditto.
– Oil, down to 70% self suffciency and dropping like a stone,
– Electricity, having fun Sydney> Do;t worry you will have lots of company soon.
– Public housing .. any left? Roll on tent cities.
– etc
All running out and/or at near maximum capacity. All requiring massive investment, then is this a ‘misallocation of resources’?
Don’t get me wrong, I live in the inner city and have cable broadband, its great, but sadly I don’t have any hamsters.
Oldskeptic,
With all the talk of peak oil and water shortages, I like you, was pessimistic. However there seem to be some great technologies on the horizon. Like Integral Fast Reactors and Boron cars; agrichar to make our farming practices much more sustainable in terms of our use of phosphorus and other fertilisers (see peak phosphorus), and to draw down carbon.
But I agree, 100Mb broadband does seem like such a waste of resources, especially when you consider that Google can deliver massively scalable solution like Google Earth adequately on the current technology. Limitations breed innovation.
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) seems like a much more sensible solution. I also like the idea of the government delivering the backbone and private companies tendering for the regional roll-out.
I have a feeling that the current suggestion will create a boom for subcontractors, whereas a sustained modest delivery will create longer term investments.
Yes that’s my summation too Smiley. A bit of middle class socialism- “My God! The poor things obviously need superfast broadband like the kids do.” However that may be coloured by being at the end of the MDB drain naturally enough and perhaps wondering if I’m the only one that thinks the world has gone stark, staring, raving mad with money and debt creation. I’m starting to get fuzzy about how long it takes to pay off black holes, probably because the billions start to sound somewhat comforting after all those trillions being bandied about.
Anyway here’s the warm inner glow-
http://www.businessspectator.com.au/bs.nsf/Article/Broadband-flood-pd20090408-QVT6H?OpenDocument&src=sph
And here’s some numbers-
http://www.businessspectator.com.au/bs.nsf/Article/The-NBN-numbers-game-pd20090408-QW5ME?OpenDocument&src=sph
Terje wrote “When did we every try hands off?”
Yes, indeed.
It’s a myth that ‘free market’ policies have prevailed in the last 20 years.
What we want through was, in fact, a golden era of Keynesian government intervention in and regulation of the economy.
In that time, it was Government meddling and regulation that also forced Telstra to implement its program of cutting staff numbers by over 10,000, close down regional call centres, shut down its linesman’s school begin importing linesmen using 457 visa, offshore its IT work and cease hiring Australian programmers, remove thousands of pay phones, begin charging of STD calls in 30 second blocks, etc., etc.
A virulent myth.
Privatising Telstra lock, stock and barrel worked for the underwriters. And a few who took T1 but not T2, or at least sold down at the peak price. Beyond that, Telstra at the consumer level has applied the dripfeed approach in rolling out new services that exploit its fibre infrastructure. Until copper is done and dusted, Telstra will keep stripping us of hard-earned while providing mediocre in return. Without the separation as originally mooted, Telstra has had a monopoly on infrastructure and its access.
I luv the idea of the wholesale 100Mbps network announced by the government. However there are several other major projects which Australia needs too: water is one big one, and new (inland) cities to remove the ongoing burden from Sydney, Melbourne, coastal areas in Qld, and so on. An inland city in today’s Australian climate cannot exist without extensive water supply from elsewhere, and won’t be created without decent rail to the area.
Observa, I don’t think “middle class” is a useful term of analysis, since it is used to describe everyone and no-one. Here, for example, your analysis implies something like “everyone above the bottom income quintile”, since most people above that level (and some below) have shown themselves willing to pay for broadband/pay TV if the offerings are attractive. (And,there’s been plenty of discussion, in this general context, about what can be done to provide access for the bottom quintile). But your rhetoric implies that you are talking about an upper-middle class minority.
Terje, I used “notionally hands off” for a reason. Of course, given the need for utilities to get physical access to sites all over the country, and for rules on how they should interface, there is no such thing as a “hands off” policy, unless you interpret, say, Somalia as an instance where the state has well and truly butted out. But, the policy of the last fifteen years was motivated by the idea that if the rules could be set correctly, “the market” would sort things out.
I would think that it would be in both parties interests for telstra and the govt to come to a deal – extended litigation is counter productive. To survive the NBN needs telstras customers and infrastructure and telstra needs regulatory assurance. Now is not the time for telstra to try and prove the govt wrong and Rudd would gain huge kudos from a successful NBN.
John, Labor has got its act together when it comes to the futuristic Fibre-To-The-Home network. As for the cost outlays I don’t have any qualms. But in relation to the time period of eight years rolling out the Fibre-To-The-Home network that is totally unacceptable. Surely they could get their act together and roll it within two years. Thumbs up.
Taking on Telstra is one thing. Taking on the less obviously obnoxious but even more powerful and greedy free-to-air TV networks another.
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). The possibility of blowing $43B on a failed venture may concentrate government minds when they come to think about regulating this killer app; with luck they won’t try and block overseas providers.
Although we still see a few offenders in the thread, it’s gratifying the number of commenters who think online applications start and finish with individual domestic consumers has declined a lot since 2007. In fact, the principal users of high speed internet are and will continue to be business and the public sector. If they can’t use technology that’s standard fare in other advanced nations, the loss of competitiveness will be serious and permanent.
Having said that, I will be amazed if the end result of the government’s initiative is much like that announced by Rudd. Putting a halfway competent minister in charge would be a positive step.
I agree with David and PeterM that I think the NBN has great potential. Consider the market: the services component of the economy is about 50% of GDP. This will be of benefit to virtualy all of them. Communications services are about 2.5% of GDP – $25bn per year. Even if you assume no growth in the sector (absurd) you should be able to pay off a $43 bn debt with a share of a $25bn per year revenue stream. So there is ample business in the sector to make this work, but there will be a fundamental redistribution of who gets the profits.
Put another way to pay off the whole capital amount without anyone else losing anything, the communications sector would have to grow about 20% to 25% in real terms over the eight year construction period, and the growth be gained by the funders of the NBN. That growth alone would pay for it, without any growth in any other sector of the economy.
I can think of many ways that growth could happen. In my area of engineering there would be great efficiency from virtual teamed drafting resources but it is very slow now to transmit 500MB DWG files in real time. NBN would be great for it. This would revolutionise many areas of engineering consulting IMO.
I agree with Derrida Derider – on-demand entertainment is going to be the killer app both for the profitability of the NBN and for the political brownie points for the Ruddmeister. There is considerable potential here for the ABC and SBS to establish a cashflow for themselves selling content to consumers without compromising their souls associating with commercial interests. I would imagine major content providers like the AFL could consider setting up themselves as direct sellers to consumers, bypassing the commercial broadcasters except perhaps as subcontractors.
That said, I also agree with rog and Ken Davidson in today’s Age that the NBN will be both cheaper and better if incorporated into Telstra’s network, which should be renationalised, leaving the retail arm of Telstra as a genuine level playing field competitor. As rog suggests (although perhaps not intentionally) this can be done the easy way (gradual amortisation) or the hard way (by direct competition the way the Rudd announcement envisages).
8.0 million households in Australia in 2006 according to ABS and then you need to add in businesses.
Click to access 32360_2001%20to%202026.pdf
So this substantially more than 5 million used in John’s initial costing.
I think many don’t nearly understand the scope of this project.
It is like going from a 186 Computer running DOS in 1980 to the latest pumped up media savy computer. Or putting up communications Satellites. What use is it, how can we afford it, are there any benefits? It was a paradigm shift.
This is the type project and capability that spawns growth of other industries and innovation.
These things not only increase the efficiency of the mediums that use them but cause a burst of innovation and invention and unforseen integrations because things become possible.
If you want to discuss cost and return and social benefits the best comparison is: Going from a Telstra owned graded two lane dirt road to an 8 lane concrete country wide autobaan.
Anything that can be converted into information and transmitted fits the techonology included your virtual doctor, radiographer, school teacher, international lecturer, architect and so on.
We should also remember that we will be hard pressed to be competitve with a rapidly emerging Asia.
In the rhelm of wireless voice and data service it has pretty much worked itself out. In wired services there was a lot of interference relating to mandated access. Regulated interconnect rules were probably reasonably enough but when somebody is forced to rent out something they supposedly own at a price decided by others it is hard to stomach references to a free market. Perhaps hands off was never going to happen but then we should not make reference to a hands off era. It was not even a lightly regulated era.
Here’s the KGB interrogating Conroy-
http://www.businessspectator.com.au/bs.nsf/Article/KGB-INTERROGATION-Stephen-Conroy-pd20090409-QWVYH?OpenDocument&src=sph
Notice he admits Labor voted against separation when Telstra was privatised and now the big stick(taxpayer competition) approach with Telstra shareholders. You can see why the serious investors have deserted Telstra and left it to the mums and dads to get done over.
If you want to be “competitve with a rapidly emerging Asia” you might need to look at the cost of labour otherwise it is just idle speculation.