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Infrastructure essential for the digital economy

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Assisted by the reality of the financial crisis, countries have begun to understand that broadband transmission infrastructure is not merely important for the direct social and economic use of citizens, but that it is equally important for the digital economy and includes critical sectors such as healthcare, education and smart grids. In addition, because broadband infrastructure enables tele-work and simply makes day-to-day living more convenient for residents, there are clear indications that property values are positively affected by the presence of such infrastructure. Several countries (Norway, Netherlands) have initiatives whereby the home owners can become the owners of the fibre tail that ends in their homes.


The International Telecommunications User Group (INTUG) commented that encouraging the ubiquitous supply of high-speed broadband infrastructure supporting competitively provided services and content will contribute significantly to growth, productivity and jobs. A study in which INTUG participated in 2008 showed that this would add 1.6-2.0% GDP in the European Union (EU) within ten years.


In late 2009 the OECD published its report on these issues and indicated that governments could justify the costs of fast broadband by using them to cut cost in sectors such as healthcare, education, transport and energy. On average, a cost saving of between 0.5% and 1.5% in each of these four sectors over a ten year period could justify the cost of building a National Broadband Network (NBN).


Once these social and economic values of the digital economy are recognised, the issue of network separation – either formal structural separation or voluntary or regulatory separation – arises, because of a systemic divergence between:

·         the interest of a network owner/operator in maintaining scarcity in transmission capacity to maximise its returns (both in selling access to the capacity and in propping up the retail price of services that depend on the artificially scarce bandwidth); and

·         The interest of society as a whole in deploying abundant transmission capacity as widely as possible and at both the lowest cost and the lowest retail price feasible. Indeed, if we are correct that there are large positive externalities to the widespread deployment of such capacity that would support providing it on a subsidised basis in order to internalise those externalities to the price facing the end-user.


At minimum, socially critical services such as healthcare, education and smart grids need to be provided at the lowest possible cost, and their Return On Investment (ROI) models therefore need to be based on utilities-based costing. Otherwise, achieving the national goals associated with those services will require, in effect, the payment of a tax to network operators whose ability to assess the tax – in the form of high payments for cheap-to-provide connectivity – arises entirely from their occupation of the public rights-of-way to reach consumers and businesses and their own economic motivation to benefit from ensuring that the supply of bandwidth is limited.


It is hard to see the policy logic that would support granting rights to use the public right-of-way in order to achieve important public policy goals and then economically impairing the nation’s ability to reach those same goals by permitting pricing at rates above the (very low) utility-based economic costs of doing so.


In situations where it is effective, competition – including full facilities-based competition – is definitely preferable to regulation. But where the market is dominated by a monopoly or a duopoly, either due to economies of scale or entry barriers (both of which appear to exist in local broadband infrastructure), it makes no sense to simply say that those who wish to compete can do so. Pursuit of competition as an end in itself, and an unthinking faith that it can and will develop regardless of the actual economic and engineering realities on the ground, is a critically ill-informed cop-out. The sheer dominance of the incumbents under the current regulatory and economic circumstances makes facilities-based competition impossible in the long run and, in any event, economically unviable.


The main reason why some countries have fallen behind in digital economy developments is because of a lack of affordable high-speed broadband access. The private interest of the network operators in minimising capital expenditures and maximising the returns they earn on the capital they do expend conflicts directly with the public interest in true broadband connectivity to all citizens and businesses.


BuddeComm believes that there is no rational basis to think that within the framework of current regulatory philosophy existing network operators have now, or will ever have, the incentive to deploy the kind of ubiquitous broadband connectivity – required to underpin the digital economy – that other nations have achieved.

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