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National broadband is anything but a failure

12 Mar
Railroad construction: what a waste of taxpayer money, am I right?

Railroad construction: what a waste of taxpayer money, am I right?

Telecom consultant Mark Goldberg had some fun the other day in slagging suggestions (like mine) that the Canadian government might want to get more directly involved in the country’s broadband and wireless markets. He pointed to an article by Jeffrey Eisenach, an economist for the American Enterprise Institute and professor at the George Mason University School of Law, that criticizes Australia’s efforts to build a super-fast government-owned National Broadband Network.

With $7.3 billion being spent so far to connect just 260,000 premises – about five per cent of the nation’s households, representing a cost of $28,000 each – it’s “a failed experiment” that never should have happened. The best way to get great services and prices, Eisenach argues, is to continue letting companies compete against each other. “As the Australians… have learned the hard way, however (sic), there is nothing romantic about pouring billions of dollars down a broadband rathole – especially when, as the U.S. experience has amply demonstrated, the real path to better broadband lies in letting the market work.”

Where to begin? Perhaps it’s best to start with some background. The AEI is a well-known conservative think tank that has received funding from many of the biggest U.S. corporations including GE, Kraft, Ford and, of course, the AT&T Foundation, according to Right Wing Watch. Its board has included executives from the likes of ExxonMobil, American Express and Dow Chemicals. If there’s a pro-big business position to be taken, the AEI has probably taken it.

The group’s members and fellows have in recent years supported such telecom merger efforts as AT&T’s proposed takeover of T-Mobile, a deal that was ultimately rejected as anti-competitive and thwarted by the Justice Department, and the current attempt by cable giant Comcast to buy Time Warner, an acquisition that is facing similar anti-trust concerns. In both cases, AEI associates have argued that further concentrations of market power are somehow good for consumers.

In his shellacking of Australia’s NBN, Eisenach also mentions that he was a consultant to Telstra, the country’s big phone company incumbent, back in 2005. He says he helped then-chief executive Sol Trujillo develop a plan to bring super-fast fiber speeds to homes, a proposal that was ultimately rejected by the government in favour of the NBN.

It’s funny because I happened to be living in New Zealand, right across the Tasman Sea, at the time and let’s just say that Trujillo – and Telstra in general – was less than popular in both countries. Sitting near the bottom end of many international internet access benchmarks, Australians were fed up by the raw deal they were getting from Telstra. As has been the experience in numerous countries, including Canada, the incumbent used every tool at its disposal to prevent or inhibit competitive services from emerging.

Trujillo presided over this and, rather than answering the concerns and working to fix them, he took an antagonistic approach that neither Australians nor their government appreciated. To many, he was the stereotypically overbearing American who thought poorly of their cultural values, which happened to hold that consensus building is often better than his own take-no-prisoners approach.

In the end, Trujillo was summarily drummed out of town. An angry prime minister cheekily (and literally) summed up the mood of the country with a curt farewell message: “Adios.” There was no contrition in the former CEO’s response, and in fact he affirmed what many had thought of him when he suggested that Australia was racist and that living there was like “stepping backward in time.”

So, interesting associations aside, what of the substance of Eisenach’s article? Is Australia’s NBN indeed a “failed experiment?” And, as Goldberg wrote, “do we really want a government agency to take [the] place” of incumbent service providers here in Canada?

In the first sense, calling the NBN a failure is really overblowing it. There’s no doubt the mammoth project, originally intended to bring gigabit speeds to 93 per cent of the population by 2021 at a cost of $40 billion, has had problems along the way, but that’s hardly unexpected. Former NBN Co. CEO Mike Quigly explained in a recent speech that the project wasn’t just a single effort. When the tasks of establishing a company, incorporating existing infrastructure from incumbents such as Telstra, building new satellite capabilities and laying fiber are accounted for, it’s more like 10 individual mammoth projects.

“The NBN is not a typical incremental project being undertaken by an incumbent telco. In a country like Australia no telco would undertake this job without government involvement. So it truly is a national investment,” he said.

There’s perhaps no better authority on the NBN in Canada than Ryerson professor Catherine Middleton, who holds the Canada Research Chair in Communication Technologies in the Information Society. She has studied Australia’s efforts in this space and has written numerous reports on it. She also strongly disagrees with assessments that the NBN has been a failure.

“To suggest that you can take all the start-up costs and divide them by the number of houses actually connected makes no sense, as it doesn’t reflect the fixed costs of establishing a national telco,” she says. “Eisenach rather glosses over the challenges of rewriting telecom legislation, structurally separating the telco, planning how to roll out fiber, establishing contracts, finding skilled workers etc.”

On top of that, NBN Co.’s most recent annual report also estimates the average cost of connecting households is running closer to $1,100 and $1,400, which is significantly lower than Eisenach’s $28,000 figure.

The biggest problem with the project has been political, and this is where critics of government intervention have a point. Australia switched governments mid-stream through the whole NBN process in 2013, which meant some of the key rules governing the project were changed. The key difference is a shift toward laying fiber to neighbourhood nodes, rather than directly to households themselves. The new coalition government figures this will get Australians faster access to faster speeds, even if they aren’t as blazing as connections right to their doors, at less cost to taxpayers.

Quigly himself has bemoaned this lack of political consensus, but what’s funny is that there is actual agreement by political parties on the need for the NBN; they just disagree on how to implement it.

Australia’s political potholes don’t have to be the rule, and in fact they haven’t been elsewhere. In 1994, the city of Stockholm decided to build its own municipal fiber network. The resultant company, Stokab, has accumulated more than 800 wholesale customers in the city, has been cash-flow positive for most of its existence and has been generating a profit since 2008.

In iterating the reasons for the operation’s success, telecom researcher Benoit Felten suggests the following has happened in Sweden:

  • Stable political consensus on the need and form of the fiber initiative.
  • A public infrastructure mindset from the City of Stockholm where the time needed to generate profit was well understood from the outset.
  • A gradual deployment that allowed for cash-flow generation early on.
  • A limitation on the resale of passive infrastructure to avoid competing with customers for active business.
  • Non-discriminatory and transparent pricing policies.

The results for Sweden have been both obvious and subtle. Not only is the country a world leader in many broadband metrics (sixth in download speeds and 13th in uploads, compared to Canada’s respective rankings of 37th and 53rd, according to Ookla’s Net Index), Stokab has also generated many positive economic benefits, as Felten outlines:

  • Increased attractiveness: Stockholm’s place in the international rankings of capital cities most friendly to businesses has been steadily increasing over the last decade, and its status as a tech hub and a location with state-of-the-art telecom infrastructure has often been recognized. Many technology companies have established headquarters or R&D centers in Stockholm.
  • Administrative efficiency: The City of Stockholm has been using fiber connectivity not only to reduce its own costs, but also to launch numerous e-services to increase the efficiency of its public services and lower their costs. More recently, Stockholm launched an open data initiative to enable third-party developers to build new services using its data.
  • Innovation driver: Stockholm has seen the birth of many tech companies that have gone on to become big players in their respective industries, Skype and Transmode being the most prominent. The mix of great infrastructure, tech talent and funding explains this success on the European scene.

Further to these points, a recent survey by the U.S Government Accountability Office of 14 federally funded and municipal networks found they generally delivered better results than services supplied by Comcast, AT&T and the rest:

According to small businesses GAO met with, the speed and reliability of their broadband service improved after they began using federally funded or municipal networks. Furthermore, according to small business owners, the improvements to broadband service have helped the businesses improve efficiency and streamline operations. Small businesses that use the services of these networks reported a greater ability to use bandwidth-intensive applications for inventory management, videoconferencing, and teleworking, among other things.

Australia’s NBN is therefore less a failure than it is a learning experience for other countries, with Sweden providing just one example of what can be accomplished when the worst pitfalls are avoided. The U.S. experience, meanwhile, shows that government-owned infrastructure can achieve superior results to those being offered by private businesses.

Ultimately, no government infrastructure project is ever going to go smoothly, but that doesn’t mean they aren’t worth doing. Free market purists may try to raise the bogeyman of wasteful government intervention, but without that alleged ineptness we wouldn’t have the railroads, sewer systems and telephone networks that we all enjoy today. That’s worth remembering when arguing about what approach is truly best for consumers and the country as a whole.

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2 Comments

Posted by on March 12, 2014 in australia, government, internet

 

2 responses to “National broadband is anything but a failure

  1. jvanl

    March 12, 2014 at 1:23 am

    Please. We have to cut the crap.

    Ask Mr. Goldberg which market paradigm best serves the Canadian people:

    1) Facilities-based competition with walled service gardens, in which service providers essentially own their customers;

    2) Service-based competition over shared open access networks, in which service providers must earn their customers.

    Canada is rapidly becoming a backwater in broadband and digital enablement because we lack the depth and breadth of leadership to keep pace with the rest of the world. It is astonishing how far behind we have fallen since a decade ago, when our broadband infrastructure was widely regarded as second to none in the developed world. We are now near the bottom of OECD rankings of broadband readiness, and we stand to be overtaken by hungry and ambitious nations like Brazil, China, Russia and the Baltic States.

    Our fundamental problem is that we are unwilling to deal with the harsh truth about our legacy paradigm of facilities-based competition in telecommunication. It is massively and unavoidably wasteful and inefficient, and structurally prone to market failure outside of large urban centers. Given Canada’s immense geography and puny population, we can least afford this paradigm.

    It is embarrassing and absurd that we are not dealing with it. We are becoming a joke.

    The ONLY way Canada can keep pace is to adopt a paradigm of service-based competition over open access networks, financed and managed at arm’s length from the services they support.

    Lines of communication comprise the basic infrastructure of modern economies, communities and societies. Broadband technologies have vastly expanded the economic and social utility of lines of telecommunication, and the economic and social horizons of broadband-enabled citizens and communities. These technologies enable radically more efficient and effective production, communication and leveraging of knowledge, ideas and information, and this is now transforming economies, communities and societies everywhere, large and small, before our very eyes.

    Broadband is no longer a nice-to-have-if-you-can-afford-it.

    It is an *essential* utility that has become centrally important to economic innovation and competitiveness, and to social and cultural development.

    We have to cut the crap.

     
  2. craigbamford

    March 12, 2014 at 9:38 pm

    Good grief. He’s trying to mock people while he’s citing someone at AEI? Of all sources?

    It’s not even that they’re shills; it’s that they’re so bad at analysis that they’ve morphed into a sort of contra-indicator. If they advocate it, it’s wrong; if they hate it, it’s right. He might as well be citing the Heritage Foundation for all the good that does.

     
 
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