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.



Conclusion

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.




Related Posts

. Revealed: Labor's 2007 billion broadband furphy

. Reserve to earth - First a cost-benefit analysis, then an NBN

. Wednesday Column: Just build the NBN and bugger the expense

. We're spending a fortune on new wires. We'll disconnect the ones you have


28 comments:

Anonymous said...

I'm looking for the breathtaking dishonesty. All I can see is a government cherry-picking the upper bound of a range.

Is there any more, beyond the laughable suggestion that gaming addiction is behind the decline in Korea's productivity growth? I can't believe you published that quote. Entire careers in comparative economic development have overlooked the 'gaming addiction' variable.

There is presumably more substance to the report.

Kymbos

Will said...

"I'm looking for the breathtaking dishonesty. All I can see is a government cherry-picking the upper bound of a range. "

Yep. That plus citing a couple of examples of the benefits that could be delivered on lessor connectivity. The smart grid stuff is certainly low bandwidth intensive though why anyone would cite Italy as a broadband shining light to follow is beyond me.

"Is there any more, beyond the laughable suggestion that gaming addiction is behind the decline in Korea's productivity growth? I can't believe you published that quote."

Yeah, that one got a chuckle out of me too. Quite absurd.

Andos said...

NBN = Concorde?

You must be joking.

Will said...

There's little doubt that FTTN to something like 93% could provide a fair chuck of the short-to-medium term benefits of ubiquitous broadband, as identified in many existing studies.

The problem with FTTN is that you are still squeezed by the proprietary rights of the incumbent, including bottleneck assets. You then need to spend big on new exchanges, upgrading pair gain and rim systems, and you're still throwing money at a CAN that will be prone to poor joins, corrosion and water damage over time - creating uneven performance and a never-ending problem with line-faults. All that maintenance is an ongoing money, and the network is technically redundant before it's even completed.

Then there's the fact that there are services which simply can't run properly on asymmetric technology, such as home diagnostics and cloud computing.

FTTP is a driver for foreign investment in ways that FTTN cannot be. It creates conditions of technology flourishing that are incredibly attractive to companies.

David said...

There is an air of desperation about this article especially as it relies on researchers and an institute few Australians would ever heard of - and Martin does not explain why they have any particular credibility. My impression is they don't have much credibility as evinced by their far-fetched comparison with the Concorde.

If the NBN costs user over three times as much for a 'ticket', and crashes with mass fatalities on take-off, I might start to worry. But I won't until then.

djm said...

See also John Quiggin's criticism: http://johnquiggin.com/index.php/archives/2010/11/29/the-wonders-of-the-internet/ (synopsis: at least one of the authors has been breathtakingly wrong about Internet development before)

Anonymous said...

There is indeed an air of desperation about this article and some of the insinuated consequences from rolling out an NBN would be laughable, so ludicrous are they.

It's very clear what the purpose of this article is - to simply spew forth as much negativity as can possibly be dredged up in order to re-frame the debate. To swamp the whole idea of an NBN in a tsunami of doubt, in the knowledge that if you just keep on endlessly spraying a blast of mud, some of it has to stick.

Quite pathetic really.

Peter Martin said...

Lets have an inquiry. Clear it up.

Peter Martin said...

Here's how you would do it.

First you would identify the problem.

Then you would examine the NBN proposal alongside other proposed solutions to work out which was the best value-for-money way of addressing it.

You would if it was your own money.

You would. Wouldn't you?

Anonymous said...

So let me get this straight. Your approach to this issue is:

1. Make increasingly shrill claims of government dishonesty and negligence; followed by

2. Demand an inquiry to 'clear it up'.

3. Repeat.

These are the acts of a pundit, not a journalist.

Honestly, it's ok to blog like this, but not to publish in a 'serious' newspaper. Have you explored any of their claims - investigated them? What value are you adding?

Kymbos

Peter Martin said...

Mate, the value I am adding is reporting. You might not have known about the paper were it not for me doing that.

As for the inquiry, it should have happened at the outset. But it's not too late.

Will said...

I don't see anything in the excerpts of the report which strengthens the case for a CBA.

With a headline like 'breathtaking dishonesty' I honestly expected something substantive. But it turned out that the best punch that landed was that Conroy used low-bandwidth smart grids as an example of the benefits of the NBN, and that Rudd borrowed a citation and nudged it into the upper range. That's some very weak sauce for such a hyperbolic headline.

I've had a quick read of the report, and it isn't very impressive. It speaks obliquely about the daunting costs of fibre within the context of tight government budgets, but only in an utterly generic sense which is ill suited to the flush Australian economy.

Its treatment of the South Korean case is no more sophistcated than Post Hoc Ergo Propter Hoc. Let's see them overlay that data across OCED and regional productivity Mentioning gaming seemed more like a typical Freakonomics stunt than any kind of real analysis.

As I see it, the case for a CBA is no stronger than it was prior to this report. At the end of the day, there is no appetite for a CBA in this parliament, and repetition isn't helping.

Peter Martin said...

Will, Rudd did more than borrow a citation and nudge it into the upper range. The citation was about something else again.

There's a history here. Read what I wrote about Labor's 2007 billion broadband furphy.

But there needn't be.

Let's properly examine these questions.

I agree that (by one vote) the House of Reps had no appetite for it.

Will said...

Ok, Peter. If the citation is something else entirely, then that is indeed something more serious.

Anonymous said...

The Kenny “report” was written on behalf of their employer, a cable and wireless broadcaster. It is crap.

A CBA, when do we consider the benefits from? 2020? 2030? 2050? We in 2010 have absolutely no idea what the NBN will be used for in 2020, let alone 2050.

Calling for a CBA is a dishonest exercise because nearly all the benefits are social.

Peter Martin said...

CBA's routinely deal with social benefits (and costs). No problem.

By the way, if we did have "absolutely no idea what the NBN will be used for" it would be a good idea not to build it. Just saying.

Anonymous said...

Interesting. Do you know anything about the consulting company that released the report, Peter? And the authors themselves? I can find little about them on the net. I trust you made sure this wasn't just a puff piece for owners of a competing technology.

I can't find much information about the company "Communications Chambers". But here's a piece by one of the authors about TV being more important than the internet:

http://www.time.com/time/specials/packages/article/0,28804,1971133_1971110_1971118,00.html

I did find this comment on another blog: "Should it come as a surprise to discover that the study was commissioned and funded by Communications Chambers, the owner of a US Cable TV and internet network. Who would have thought that a cable company would commission a report that opposes the rollout of a competing technology."

I can't confirm the validity of the reference. Can you?

Kymbos

Anonymous said...

Hmm, they might be confusing Communications Chambers with Chambers Communications:

http://www.cmc.net/~chambers/

Kymbos

Peter Martin said...

Fair point.

For the moment can we treat the claim the Kennys' report was commissioned by a cable and wireless broadcaster as a myth.

Not that it would invalidate it if it was.

Strewth. Most of the pro-NBN reports have been commissioned by vested interests.

Will said...

"By the way, if we did have "absolutely no idea what the NBN will be used for" it would be a good idea not to build it. Just saying."

That's clearly not a good faith attempt to parse what Anonymous said. We know there's a baseline threshold of benefits for FTTP. We know some of these benefits are shared mutually with ubiquitous FTTN. Whatever this report says, clearly there are also other non-trivial benefits that are only possible through the unique characteristics of last mile fibre: super-low latency, interference-free, reliable consistency (ie. committed speed subject to the GPON configuration), and upstream symmetry (failing 1:1 at least 5:2).

We can also be supremely confident that our current bandwidth and data needs will rise rapidly in the future. We know that FTTP will immediately enable a suite of services running in parallel and that such services will provide an immense upgrade to stranglehold of Telstra over fixed line PSTN, and the Foxtel consortia with PayTV.

Beyond that, we must be agnostic about the exact nature of future usage or specific applications if we are honest. That's especially the case for the long term future. However, the NBN is a long term gift to the nation. And that uncertainty ought not to deter us all from giving our consent to our political leaders to assign a value to that future and acting upon it. The difficulty of quantifying this exactly in a CBA does not make it any less real. For example, the copper CAN we use now could not be assigned a net present value based on the positive externalities of the internet - yet that value was no less a reality. Our ancestors could not have foreseen that usage then, but we have no such excuse to blind ourselves to the probabilities and the possibilities.

Fibre is not picking a winner in any meaningful sense. It's just a pipe; it's a technology-neutral piece of infrastructure that will not be redundant or useless for the foreseeable future. It's a enabler for the digital age, and certainly nothing like specific consumer hardware, such as Beta video tape or any other trite example I see typically used.

As an economist who has hopefully internalised at least some of the cautionary lessons of behavioural economics and finance literature, and someone who reads Krugman regularly, and should, therefore, understand the deficiencies of being overly enamoured with the too-clever elegance of mathematical models, I would hope you would not be so quick to rely on absolute primacy of mechanistic and formulaic thinking in policy.

Anonymous said...

That is exactly what I meant. The NBN will be used for internet, IPTV and phone calls. But like the copper CAN that came to be used for the internet we have no idea what other killer use will arise for the NBN.

I am on pair gain, other people are on a RIMS, a small exchange that cannot house anymore DSLAMS or that Tesltra won’t allow to have DSLAMS. So, like many others I am on 3G wireless—s l o w—as will 4G wireless be once enough subscribers have migrated to it and I take personally attempts by people to deprive me and people like me—hell, there is like 10% of internet users still on dialup!—of access to fast broadband! Especially when dishonest arguments are used!

Peter Martin said...

I don't want to deprive you of access to fast broadband.

You sorely need it.

On the other hand when it comes to people like me who already have that access or could get it...

Anonymous said...

Can you get it Peter?

The same bandwidth, the same symmetry, the same lack of attenuation? Ease of upgrading to 1, 4 or 10Gbps? No is the honest answer.

We didn’t have a CBA before each of Costello’s tax cuts for the rich and they are why we now have a huge deficit over the forward years. The NBN by contrast costs peanuts and is an asset for at least 60 years.

Peter Martin said...

You are probably stuck with the same symmetry.

In Tasmania NBN retailers are suppling households asymmetric services.

Anonymous said...

Sigh. That is the Tasmanian trial. If you actually read anything NBN Co puts out it talks of symmetrical speeds once backhaul is done and a fair bit rolled out on the mainland.

Tassie is a trial, sorta like a CBA? And did you see the people all want 100mbps so much that internode has had to buy more backhaul etc.

Why don’t you just say you want to be one of the few with high speed internet, Peter?

Peter Martin said...

The latest on symmetry: http://goo.gl/NshVp

"The starting point for fibre services would be 12 Mbps down/1 Mbps uplink. Other speed tiers included 25/10, 50/20, 100/40 and eventually 1 Gbps/400 Mbps."

(I am not pointing this out as a criticism of the NBN by the way. There are very good reasons for offering asymmetry - it fits the needs of users.)

Anonymous said...

http://www.itnews.com.au/News/240502,stanton-high-speed-internet-could-be-worth-182bn.aspx

Anonymous said...

Those figures, only a starting point as you say are still better than the alternatives but many will want much more symmetric services. HD video phone calls/conferencing for example, in the home WAN games and video phone calls. I will want a more symmetric plan than the above.

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