Monday, November 29, 2010

Overselling fibre. Ouch.

The dishonesty has been breathtaking

The Australian government has been accused of misusing research to build the case for the National Broadband Network in an international study that finds the claimed benefits "grossly overstated".

Released in London ahead of today's Australian parliamentary vote on legislation to support the NBN the study finds evidence to support the claims made for fibre-to-the-home "surprising weak" and cites Australia as a key example.

"All else equal, faster is better," says the study, prepared by British telecommunications consultant Robert Kenny with Charles Kenny from the US Centre for Global Development. "But faster technologies don’t always triumph; think of passenger hovercraft, maglev trains, and suspersonic airliners. Concorde (if it hadn’t retired) would still be the fastest passenger aircraft today, having first flown in 1969. It turned out that the incremental benefits of speed to most customers were not worth the extra cost."

Korea, cited as the world leader in providing fibre to homes, enjoyed productivity growth of 7.6 per cent per capita per year in the decade before it began the program and 3.8 per cent in the decade since.

"Many factors played into the growth slowdown," the study says. "But maybe the massive increase in online gaming, facilitated by the broadband revolution, played a role – the South Korean government estimates that as many as two million of its citizens are addicted to online gaming"...

Worldwide, the authors find a weak negative relationship between fixed broadband rollout and economic growth.

In launching Australia's national broadband network in 2009 Prime Minister Kevin Rudd said 78 per cent of the productivity gains in service businesses and 85 per cent in manufacturing flowed from information and communications technology.

The study traced this claim back to two papers from Australia's Communications Department referring to gains of 59-78 and 65-85 per cent.

"What was an upper bound in the research has become a mid-point in Rudd's speech," it says.

"But more importantly the research was looking at all technological factors. Thus the figures cited include the benefits of everything from biotechnology to the rise of containerized transport." Also the research cited by Mr Rudd covered the periods 1985-2001 and 1984-2002, "when the internet was in its infancy and broadband was pre-natal".

The paper says claims about the benefits of e-health, smart-grids and online education bear little relationship to fibre-to-the-home.

Italy, the world leader in smart electricity grids and uses copper wire and the mobile phone network to provide the minimal bandwidth needed. A key US study on potential of e-health was conducted using small cameras and dialup. The YouTube education library enables 300 universities to provide 65,000 videos in seven languages across 10 countries using existing technology.

Other claimed benefits such as a shift to home working or remote medical care would themselves entail big costs in addition to the broadband netword. Business and government applications such as remote medical imaging require connections only to major buildings rather than every home.

"Julia Gillard will now have to include the authors of this study along with Reserve Bank governor Glenn Stevens in her growing list of wreckers, Luddites and enemies of human progress," said Shadow Communications Minister Malcolm Turnbull. "Their paper underlines the need for a thorough cost benefit analysis of the NBN adventure."

A spokeswoman for Communications Minister Stephen Conroy said the NBN would be fully scrutinised through regular Senate Estimates sessions and a Joint Parliamentary Committee which would report every six months.

Published in today's SMH and Age

Overselling Fibre

Executive Summary

overnments around the world are investing multiple billions to support the roll-out of fiber to enable high speed broadband. These subsidies are based on the premise that fiber to the home (FTTH) brings substantial externalities. It is argued that FTTH will support economic growth and is key to national competitiveness; that it will benefit education, healthcare, transportation and the electricity industry; and that it will be the TV platform of the future.

In this paper we argue that the evidence to support these views is surprisingly weak, and that there are several errors that are made repeatedly when making the case for FTTH. In particular:

- The evidence that basic broadband contributed to economic growth is decidedly mixed, and some of the studies reporting greater benefits have significant flaws

- Time and again, data that basic broadband brings certain benefits is used to justify investment in fiber – but the investment in fiber must be based on the incremental benefits of higher speed, since (in the developed world) there is already near universal basic broadband

- This error is compounded since other high speed broadband infrastructures (such as cable, and in time wireless) are often simply ignored when making the case for fiber

- Fibre is credited with bringing benefits that would in fact require major systems and social change in other parts of the economy, such as a widespread shift to home working, or remote medical care. In practice, these changes may never happen, and even if they do they will have significant additional cost beyond simply rolling out fibre

- Frequently business or government applications, such as remote medical imaging, are used to make the case for FTTH. But these applications require fiber to certain major buildings, not to entire residential neighborhoods (and these buildings often have high speed connections already)

We do not argue that there is no commercial case for rolling out fiber, nor do we argue that fiber brings no societal benefits. But we do believe that those benefits have been grossly overstated, and that therefore, particularly in a time of tight budgets, governments should think very hard indeed before spending billions to support fiber roll-out. A decade ago telcos wasted billions of shareholders’ money on telecoms infrastructure that was well ahead of its time – governments are now in danger of doing the same with taxpayers’ money.


Supporters of fiber subsidies note that the market is not rushing to install ubiquitous fiber networks – that telecoms companies are waiting until they better understand the business model and the extent of regulatory technical and operational risks. Governments should be wary of stepping where telcos fear to tread. These are, after all, firms that have happily rolled out access in war-torn Afghanistan and Iraq. Risk is hardly an alien concept to them. Perhaps their caution is well-founded.

If governments subsidise rollout enough, surely at some point the fibers rolled out will fill with data traffic. If consumers don’t have to pay more to get it, they’ll sign up to superfast, and companies will provide enough bandwidth-hogging applications to light the fibers. The question is, will the subsidies have been worthwhile? Will the applications be valuable enough to justify such a large investment? Given what we know to date, the answer appears to be no.

The argument for government subsidy at this point looks particularly threadbare because it is unclear the compelling market failure that the subsidy would overcome. Multiple streaming TV on demand is not a technology that creates ‘network externalities’ like a telephone or email account. I benefit from my ability to email or call you. I don’t benefit from your (little-exercised) ability to watch the Olympics in high-def while the kids are streaming Toy Story III in the basement.

Fiber advocates have claimed externalities such as improved healthcare or reduced electricity consumption. As we have seen, these benefits are speculative at best, and are frequently based on crediting fiber with benefits that in fact stem from basic broadband (or even dial-up).
When there is no apparent need to rush into investments in an unproven technology, the answer – especially in the midst of a global downturn – is to wait. Spend today’s stimulus dollars on something with a guaranteed social return (better public transport and pothole filling, as it might be).

If money must be spent on connectivity, spend on widening access to basic broadband; or coax those not yet online to take the broadband services already available to them; or invest in freeing up spectrum to meet the burgeoning demand for mobile data services (no agonising about what might be the killer-app there), or improve the capacity of the middle mile.

At the turn of the last decade, telecommunications companies threw away billions of dollars of private investment by spending on long-haul fiber networks that turned out to be far beyond what was needed for many years thereafter. At the turn of this decade, governments risk doing the same thing with tax-payer dollars by overinvesting in fiber in the access network. Hi-def TV on demand is no way to guarantee short term economic recovery or long term prosperity.

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