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The Broadband Dividend
By jpenston | June 19, 2007 |
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The Question
There’s a question that I have been struggling with for a while now. The problem is that it is too difficult to answer, because there are just too many angles for my little brain to cope with.
What is the economic value of broadband to a country?!?
Why does it matter?
The answer dictates the role that governments should play in telecoms policy making and infrastructure build.
After concluding in a recent article that BT were right to return cash to shareholders rather than invest in FTTH, and looking at the (remote) possibility of anyone else doing the same, it has been clear to me that we will be hearing ever more pleas for government intervention (as in April’s BSG report). These pleas have come from all over the place, why?
Partly because no-one wants to spend the tens of billions that it may cost, I’m sure. If I want it, but I can’t afford it, of course the government should buy it for me, right? Seriously though, is it because the economic value of broadband to a country stretches far and wide, well beyond the “telco value chain”? Can the breadth of benefits ever accrue back to a commercial entity making the investment, without distortion from naive attempts at creating artificial competition?
Market Failure
Of course, post Adam Smith, we are predisposed to giving the market a chance to achieve development and innovation without intervention from public funds, but are the benefits from broadband (the Broadband Dividend) too complex for the market to work out quickly without intervention? Would we have a ubiquitous phone network without earlier (direct) intervention? Where would we be without the phone…? Is the whole market-based philosophy wrong for such a national asset?
Ofcom are busily trying to figure out the Digital Dividend - the value of freeing up the spectrum that is still used by analogue TV - but I wonder whether this is missing the wood for the trees.
They are spending 56% of their £126.7m annual budget on spectrum allocation work, so let’s hope they get this right. They can probably afford to put a little of this into answering the bigger question: Is broadband worth anything? Or is it that it will cost us to not have it? The answer to these questions matter a lot.
While it makes sense to look at spectrum allocation policy, I am struggling to understand how this can be ring-fenced from other digital transmission, wired and wireless. In the end, it is all just ones and zeros that can be used for anything from a phone call, to a TV station, a public health service to telematics. Call it digital if you will, but in order to encompass what I think is a much wider view than is described by “Digital Dividend”, I am using the term “Broadband Dividend”.
What am I talking about?
What is the Broadband Dividend then? Do countries need broadband in order to compete? Or is it even more acute: do their people in fact need broadband to access basic public services - to take part as citizens in society? Perhaps not today, but is that where we are going?
Consider this vision of the Broadband Dividend taken from a Memo to the Select Committee on Culture, Media and Sport:
As connection speeds increase, this digital revolution will continue to change our lives as consumers, as professionals and, provided we create the right conditions, as citizens: a universal [my emphasis - JP] and affordable supply of bandwidth could underpin a sweeping transformation in the delivery of many public services, ranging from the distribution of public information and the administration of bureaucratic processes to the provision of on-line education and health advice. For individuals, organisations, communities and the UK as a whole, this could help unlock new worlds of efficiency, opportunity and productivity.
The source may surprise you - it is taken from a submission by NTL… Admittedly, its dated October 2005, but it was quirky so I thought I’d include it.
What’s wrong with the approach?
If this is the future, then perhaps we should be challenging some of the core assumptions underlying current government, regulatory and spectrum allocation policy? Viviane Reding certainly seems to think we should. “I do not believe that high stakes auctions in which only those with the deepest pockets can take part would be effective. We need to encourage investment and competition — we need cheap, wide-band services for all”
If we auction the valuable resources, we artificially inflate the cost of access. Auctions are nothing less than an airwave tax which filter down to increased prices to users. But, argues Ofcom, “It is the organisations that have the business plans to make the most effective use of that spectrum and maximise revenues [that will win out] if we have an auction mechanism.”
The Politics
Network Neutrality the Sequel: this time the battleground is the ultra-valuable UHF spectrum, with Google arguing that this should not be hoarded by netcos as a defensive measure against competition for their sunk assets. The problem for regulators is that in many cases, the cost of sunk assets was a direct result of regulatory policy at the time of investment - like the auction of 3G licenses.
Although there may, even now, be a case to tear up history for the sake of the greater good going forward, doing so might trigger a lawsuit or two from those who have invested in the past in good faith. Companies bought licenses or sunk fibre on the basis that doing so gave them a certain competitive advantage over those who did not. If there is a risk that today’s investments could be invalidated by swings in regulatory policy tomorrow, that investment won’t happen and there will be no Broadband Dividend. That, I’m afraid, is the flip side of the argument: just tabling the possibility of a rethink may ensure a failure in the overall objective of encouraging investment in new capacity.
But that is not how some see it. Of course spectrum should be given away to anyone and everyone, argues Google, how else will users be able to get onto their services? How can we make money if users have to pay someone else first, they might ask (I made that up, but I’m getting an increasing feeling of a dark side to the big G).
Although I am uncomfortable with Google’s role in the debate as they so clearly stand to gain commercially from the outcome, their position raises an important point on Broadband Dividend question that I think is being fudged because of the difficulties balancing past policy with future opportunities and needs.
The Greater Good
If broadband is required by countries, to establish favourable conditions for business and to citizens, to enable them to take part in society, we are now talking about a higher goal than can be catered for in a “business plan” as suggested by Ofcom. In fact, business plans and economics in general assume scarcity, whereas the higher goals mentioned require equality, ubiquity and perhaps even subsidy.
Does Broadband become a requirement in order to interact as a citizen with your government, and the public services that they provide you? If it is a requirement on the citizen to interact in this way with their government (because it makes government more efficient) or if it gives you advantages over your fellow citizens who do not have access, then does the government have the obligation to ensure that equality of access is available to all?
If the Broadband Dividend is significant, it suggests that countries need to ensure ubiquity of access within their territories to level the playing field for their citizens and maximise the use of scarce land & property resources. For business, high bandwidth might give the country a competitive edge with their neighbours so it may not be enough to simply ensure ubiquitous coverage - ubiquitous high speed coverage may be required. Is this a recipe for success in the global market economy? Or a lavish white elephant like the Millennium Dome?
Some Reference Points
The Central Development Corporation states that for Canada at least, the Broadband Dividend is CA$ 75bn annually (£36bn) or CA$ 2,500 (£1,200) per citizen. There seems to be no other source for that number, but if nothing else it’s a stake in the ground.
When the Korean government undertook their thought leading intervention in 2004, they estimated that their project would add US$ 225bn of economic value over 10 years and lead to the creation of 820,000 jobs. Clearly, this is not a zero-sum game in their view… I wonder how much of this saving came from a reduction is the cost of the clergy?
Citynet quotes a study by the Allen Consulting Group in Brisbane, Australia into the value of broadband there, but it all seems a little woolly. Another stake in the ground, if nothing else.
Intangibles
What is a country’s Broadband Dividend except a wild guess anyway? Measuring the impact has not yet started because we do not understand where all the benefits, and costs, of internet access are. Consider some of the contributing factors to an answer, and how little of these benefits will ever accrue back to the commercial entity making the investment in the infrastructure that makes all this possible.
Last week BBC Newsnight ran a feature on rural communities which included a piece on a Dipsticks Research. They employ around 30 people and are based on an old farm in Northumberland (far, far away from some of their competitors in Central London). “Emmerdale with Laptops”, they said. Certainly, what they do is not possible without broadband.
Such outward migration of the population - away from the cities but still “connected” by broadband - can save companies and employees huge sums of money in rents and other costs and it leaves some of the benefit as new money into the host communities. This benefit might just be the occasional £50 for a tank of petrol at the local station or an employee or two deciding to relocate closer to work - increasing house prices - but all of it increases the wealth in general of the host community.
For centuries, populations have migrated towards the cities and the coastal regions (see this map of population density), driving property prices in those areas skywards. While this has driven growth in those cities, it has left great chunks of viable land severely under-utilised simply because people living there have the economic power of an ant. If that space can now be used by people to live in without compromising their employment prospects, we might be able to host larger populations - with the associated growth in the economy as a whole.
Consider also the ongoing change to working patterns, in particular, to the regular place of work. Broadband does not eliminate travel, but it can significantly reduce it: “In spring 2005 there were around 3.1 million people in the UK who worked mainly in their own home, or in different places using home as a base“, according to the ONS. This was up from 2.3m in 1997, saving ever more time that would otherwise be wasted commuting. The economic and environmental impact of broadband driven reductions in travel could be very significant, but we do not understand the question let alone the answer. Don’t forget the benefit to those that remain in the city - one less person trying to squeeze on the Tube in the morning…
Over and above the impact on travel, there is a positive impact on innovation and entrepreneurialism. Starting a business from an office with fixed costs from day 1 can break a business plan. Now of course, it is possible to run many businesses from home just as effectively as from the centre of a large metropolis. 62% of those home workers in the ONS data are self-employed and while many of them may make only a marginal contribution to the economy there are of course diamonds hidden in the rock that could make a big difference, especially in knowledge based sectors.
The End
I could go on working through the various areas where broadband can have a fundamental economic impact on a citizen or on a country, but like everyone else’s attempts, it would be partially complete. Solving this question will take some big brains a lot of time (and money). My aim in this post is to get some thoughts going because as Confucius said “a walk of a thousand miles begins with a single step”.
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Topics: FTTH, Google, Ofcom, digital divide, next generation networks |
June 21st, 2007 at 9:44 am
With regards to the FCC’s auction of prime wireless spectrum, the bidding rules will be THE KEY on the auction’s success of creating new competition for broadband Internet in the country.