Broadband: Why the government should intervene

Moriarty

The following is from a column update by an industry specialist in the UK. This is copy'n'pasted from http://www.barrysworld.com/news/columns.asp?Category=65&Author=92

It is a pretty long article, but is well worth the read.

Broadband: Why the government should intervene
Tuesday, December 18, 2001, 04:05


The most common complaint heard in recent times about the slow rollout of broadband in the UK comes not from the world of whinging campaigners, but from the mother of all telcos itself, BT. The argument being put forth is that Broadband is simply a technology of limited desirability, like videodisks, and that take-up will probably never be that high. The accusation is clear - we, the mighty campaigning nerds - have bullied the poor little telecoms industry into wasting billions of pounds on our own ( extremely dubious ) purposes.

Not only does the low take-up of broadband seem to indicate a lack of demand for broadband, but when asked exactly what broadband is socially useful for, fierce proponents often don`t seem to be able to say. It is almost as if having been grumbling in the damp depths of the internet for so long, asking the question has a blinding, dazzling effect on the lobbyists. "All types of cool stuff" seems to be the main answer, by which we know that they really mean pornography, illegal music and games.

But what kind of a platform is that for lobbying in the political world? Given the dubious moral and social benefits of spending any money on these past-times, one may well ask why there even is a fuss about `broadband Britain`. Surely those who are looking for such past-times have no right to go complaining to the government and the press that they are not being sufficiently supported. Isn`t it entirely obvious that government time and money is much better spent on improvements to schools, hospitals and the police?

I will not here go into an argument which tries to say that Britain will be more productive, or better educated if it gains a good broadband infrastructure, although these are the most commonly used to justify government intervention. Such arguments can only be formed with data that has not yet been gathered. So these are not the rocks on which I will argue against the proposition that there is no compelling case for government action. Instead, we will build the argument from a vision of the future.

The government must come to realise that widespread, always-on broadband internet connections will be part and parcel of future societies. We do not know much about what the system will look like, but we can say the following. First, It will be an IP network, although an evolution of the current version 4. Second, we can predict with confidence that a time will come at which universal access will become a policy imperative - just as it is for normal telephony at present. Given this limited amount of knowledge that we have about the future, the government should start asking `when and how will we get there?`

In asking this question the first place to start is with BT, as the current holder of the only nationwide communications network. We must ask of it, "What is BT likely to do with broadband?". The answer is simple:

- provide expensive broadband,
- to a far-from-universal percentage of the British population,
- in a position of monopoly over large swathes of the country,
- for the indefinite future.

The government must understand that this situation is not compatible with the creation of widespread cheap broadband, and no technological change (not even an unforseen fixed wireless revolution) , or any amount of regulatory tweaking will counteract this so long as BT hold a de facto closed network across most of the country.

Nearly a year ago I wrote about how regulation could never be a powerful enough tool to overcome these incentives, and to encourage open, competitive use of BT`s network. Various voices, some of them in the government, told me not to be so silly - of course BT couldn`t buck the regulator. A year later BT has managed to keep total unbundled lines to below 200.

One of the more interesting ways it has achieved this is through a cunning pricing policy, the importance of which will be explained shortly. BT has been pricing its wholesale product very aggressively when compared with the cost and risk of purchasing unbundled lines. Its purpose for this can only be seen as trying to preserve its remaining monopoly over parts of the UK - otherwise these relative prices are inexplicable ( unbundling should be much cheaper given that BT doesn`t have to actually supply any services to the reseller after the install ).

The reduction of wholesale cost may actually have cost BT lost revenue in the short term - but crucially it has kept BT`s monopoly on the only national local loop intact. This monopoly is BT`s greatest asset, worth hugely more in the long term than a higher short term price. It is not the first time it has shown clear awareness of this - just look at the eventual solution to unmetered modem access - making the only attractive solution a wholesale BT one. From one monopoly is another born.

Those who have followed my work will know what comes next - a recommendation for the creation of a NetCo, a company that owns and rents access to the local loop, but which doesn`t offer any services down it. The example of the Gas and electricity industries show the obvious advantages. However, retreading old ground is not the point of this article. Whilst the position of BT remains the central issue (shamefully overlooked by government) this article has fresh paths to tread. The central one of these is - should broadband be actively subsidised by the government, to reduce prices, or increase rollout?

The answer to this is tangled, so I will start with the simplest strand. In some areas the answer is yes - government will have to invest if it is to deliver services in areas which will otherwise be uneconomic to serve. This is already a de facto part of much government policy - every time you send a letter 200 miles for the same price you send it 200 metres you are taking part in an analogous policy.

Despite the inevitibility, there is a certain desperation in government statements on this issue. It is manifest in the hope that somehow getting broadband to remote areas will be a problem solved by technological evolution, without the government having to spend anything. This entirely misses the point. Any product will be cheaper where its costs are spread over many consumers. It is therefore not the remoteness of locations that is the main problem - it is the fact that there simply aren`t very many people there to be consumers.

The second strand of the answer, arguing that there should be subsidies for major urban areas where most of the UK population live, is not something I can advocate. There would have to be a firm cost/benefit analysis showing that expensive broadband was directly costing the country X amount more than it should. Such a case can perhaps been made, but the sophisticated economic modelling required to do so has not yet been performed. As stated before, for the purposes of this article we will assume that no such economic case currently exists.

Nevertheless, there is one economic argument that can reveal a conclusive cost. BT`s systematic monopoly-preserving behaviour ( discussed above ) must, by definition, cost the UK economy at least some amount. Elementary economic theory shows that if we understand BT`s actions as monopolistic, then there has to be a loss of `consumer surplus` to the monopolist, and hence a market failure. We can therefore link a cost directly with government inaction. It is reducing this cost through changing the role of BT that the government should focus on first and foremost. Proposing to subsidise an inefficient system to reduce its cost to consumers is a ludicrous way of approaching any issue. Only once the local loop is open will looking at the cost of broadband with an economists eye to public subsidy be even worth considering.

"OK, OK" retort the naysayers, "so we can see that we`ll have to get involved in at least some way, if there is ever to be meaningful universal internet access, especially to rural areas. But that doesn`t change the issue - we can`t `pick a winner` technology-wise yet, so we can`t invest."

Not "picking a winner" has become a comfort blanket for the government, reflecting decades of much rued mistakes doing just that. However, there are three important mistakes made which make this precaution not entirely valid in the case of broadband. The first is the fear that somehow networks might ever be radically different in terms of what data format they they transmit - as if IP is somehow going to vanish like Betamax. The second is to assume that the government would have to `pick` an entire end-to-end solution to have an effect, rather than just one part of the chain. The last is a failure to understand the long-term value of fibre optics, as that crucial link. Not only are fibres not likely to go out of date in the near future, but you don`t need huge to-the-home fibre networks to transform the internet access levels of areas where a fibre terminates. Taking a single fibre to a village could see it through numerous stages of technological development, reflecting different levels of demand. First it could cheaply supply ADSL down copper, then perhaps wireless Ethernet a few years later, then perhaps full blown gigabit Ethernet cable to homes later still. The same fibre will still be useful, regardless of what equipment is placed at each end. It is a winner that the government should not shy from picking.

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Moriarty

<continued>

So, what has been achieved in this wandering tale? To summarise:

1 - The government must not buy the line the broadband is and will remain a niche, luxury commodity.

2 - The government will clearly have to subsidise some areas if they are to be able to have internet access at the same price as elsewhere. This idea of parity-despite-geography is already commonplace in other government policy.

3 - The true cost of delivering broadband in the UK cannot be seen until the local loop is properly opened in one way or another. The government should not even look at subsidising mainstream broadband until it has done this.

4 - The government should be less scared of picking a winner when fibre optics are so adaptable to technological change, and laying them allows so many players to `plug in` different competing end-user technologies.

Steiny

One of the best articles i have read about the situation in the UK, and an almost exact mirror-image ( minus 18 months ) from what is happening here in Ireland.

I would agree entirely with his read on the situation, and on his suggestions on how to go about solving the current problem.


Comments?

mike65

Excuse my presuption I have'nt read the article but I'll
guess it basicly said-

The internet is a national resouse which is not being
used to its fullest effect because the government won't
compel the incumbent operator to make it availible and affordable to all and therefore we as a nation are
in danger of being left behind in the race for tomorrow.

At least if it does'nt say that it should.

Here the gov sold eircon for a mess of pottage and the rest of us are suffering for it.:mad:

Mike.

Moriarty

Mike65- part of its about that alright although it does go on to suggest how things can be set right. The solutions brought up would be ideal.

dathi1

Broadband: Why the PEOPLE should intervene.

In the latest issue of Wired Magazine American indian reservations are setting up their own broadband wireless networks. I think its about time we took matters into our own hands and circumvent the whole isp / cable / telco set up. I'm already testing wireless myself and hope to post details as soon as I can. To start with set up a wireless router hub on a mountain site then issue cards, amps and mmds antennae to members. Lease some fat pipe space from a college and then start a subscriber program.

With the right momentum this will take off much quicker than the cable tv reflector systems (complete with election candidates) ever did.

Dustaz

dathi, there are other people with the same idea.
Check www.irishwan.org

Fergus

It is interesting the way the article started highlighting the ambiguity surrounding the potential of broadband.. and then it seemed to gloss over that problem a bit. Perhaps we could do some more thinking of our own on this..

NeilF

Isn`t it entirely obvious that government time and money is much better spent on improvements to schools, hospitals and the police?

The argument that it is just geeks who want it is baloney and loses all credibility by equating the cost with teachers, nurses and doctors. Does the industry specialist write for the Sun?

In the same way there was an industrial revolution two centuries ago, these days we are going through an Internet revolution. And in the same way the industrial revolution replaced people with machines the Internet revolution is going to mean people no longer have to physically be somewhere to conduct business. The biggest benefit to Ireland is that our largely rural society will gain access to products and services previously only available to those in the capital, or other countries. Would IrelandOffline have grown as large or as quickly as it has if we were relying on small ads in local papers and the "conventional" media? If any proof were needed of what the Internet revolution is about it is us, and what was achieved through ie.comp and boards.ie.

the article started highlighting the ambiguity surrounding the potential of broadband.. and then it seemed to gloss over that problem a bit.

I would have though the potential is bloody obvious! Even Eircom managed to figure out what we might do with it in their "use your mouse" campaign. A couple of weeks ago I got on a train from Limerick and happened to sit beside two people who it transpired were from Ennis (the information-age town). A man in his fifties was saying how he was using Tesco's Internet shopping service to do his Christmas shopping and how useful he found it. What have Eircom learned from the much hyped Ennis? Do we embrace broadband or not?

We know ourselves what we could do with broadband but I'll mention a few. If unmetered always-on 128k or 256k Internet access (my definition of broadband) was available to everyone my GP could have his diary on-line for his patients to make their appointments whenever they wanted. If web cams became the norm perhaps with broadband you wouldn't need to visit him at all; he could make a diagnosis on-line. Five years ago you had to either physically go to a bank or ATM machine or phone your branch (to post a statement, the info wasn't available over the phone) to get the balance of your account. Now you can get it on the web. On AIB's site you can even deal in shares. Broadband could mean even more banking and insurance services on-line. I tried out Tesco's Internet shopping service for Christmas and all I can say is it is a brilliant facility that would be greatly enhanced by broadband. I could have several pictures of each item and perhaps even some primitive VR. My "smart" fridge could order things when they run out.

One point in the article, where the situation differs very differently from Ireland, is the way BT held onto its monopoly via various cheap wholesale products. Eircom on the other hand I think became too obsessed with the content. They had ideas of not alone having the monopoly on the infrastructure but also on the content. There were all these multimedia divisions that were the first to get the chop when times turned bad. There was video on demand etc. when all we really wanted at the time (two years ago, when Esat offered NoLimits) was FRIACO and today is a modest ADSL service. When Eircom talk of x million in broadband how much of that was in content? BT just charged other telcos to use their lines. Telcos are happy, BT is happy, users are happy. Eircom spend the money on the Ferrari and forgot to build the road and has upset everyone.

I'd be very surprised if the government renationalised the local loop for several reasons. It would cost a lot, money we no longer have. The network would then need further investment to bring it up to scratch. It would be admitting they got the floatation wrong. Eircom may fight it for years in the courts. The ex-shareholders won't be impressed. The government are in general for privatisation.

Perhaps one solution would be to build a second network, either fixed or wireless, that had a rollout plan to connect to everyone who wanted it in two years. If it were done a public/private partnership basis the government would have much more influence in how it was operated, and be able to guarantee loans etc. but a commercial company would run it and source investment etc.

However, it would have to be operated by someone with no connections to a telco. I wouldn't want Esat running the second network because you'd have a duopoly. If it worked Eircom might in time sell its network to the company too because all the other telcos will not have the costs/overhead/problems of maintaining a network and that will put them at a disadvantage to everyone else. You could in five years have a national wireless and fixed network under government control.

Moriarty

Originally posted by NeilF
Isn`t it entirely obvious that government time and money is much better spent on improvements to schools, hospitals and the police?

The argument that it is just geeks who want it is baloney and loses all credibility by equating the cost with teachers, nurses and doctors. Does the industry specialist write for the Sun?

You have missed the context that was meant to be in. He is repeating the oft-used reasons against investing in a telecoms infrastructure used by, as you rightly point out, the type of journalists that work for the sun.

If you visit the link at the top to his column, you can check out his previous articles that discuss this point.