FTTH Cost Benefit Analysis?

By John Nixon 17/08/2010

In both New Zealand and Australia there have been many calls for the publishing of an accurate cost/benefit analysis to justify the taxpayer investment in the UFB and NBN networks.

If you read the New Zealand Herald, you may have seen an excellent article by Chris Barton a couple of days ago.

Chris’ comments are equally applicable to both countries’ critics, and Chris has allowed me to reproduce his very logical piece, mainly for my overseas readers.

The piece is subtitled “Those who call for a cost-benefit analysis of the plan  (UFB) don’t understand the Internet“.

Chris Barton

Commentators over the last few weeks have argued the government’s ultra fast broadband plan is crying out for “a rigorous cost/benefit analysis” that’s “nowhere to be found”. And that we should be concerned that Telecom might miss out on the government’s $1.5 billion investment. To which there is really only one reply – bollocks.

Of course we want ultra fast broadband. The faster the better. Bring it on at the speed of light and beyond. Those who tut-tut that we can’t justify a fibre optic rollout in cost/benefit terms, or argue that the productivity gains from slow to fast broadband are negligible, betray a terrible lack of understanding of what this thing called the internet is. And what happens when speeds on the greatest goods and services delivery mechanism the world has ever seen get really fast.

The internet is not the web. It’s the tracks that deliver the web, but also a whole lot of other kinds of traffic – music and movie files, software, instant messages, phone calls, video conferencing, streaming audio, fabrication data, computation and heaps of other stuff in a list that goes on for pages.

When you make this traffic flow very fast – and the change from the few megabits per second we currently get on broadband to 100 Mbps proposed is enormous (www.med.govt.nz/templates/ContentTopicSummary____41902.aspx) – something else happens. At high speed the network becomes the computer. And all sorts of other possibilities emerge – dumb devices such as mobile phones or tablets connect to servers on the net and do complex things. The switch to computing in the cloud, computing as a utility, the net computer, or whatever you want to call it, has huge implications for economic development, not to mention surveillance, security and privacy, that we’re only just beginning to realise.

In the face of all this, to call on the crude economic tool of cost/benefit analysis, is just plain silly. Such an analysis would have to take into account so many variables that the model falls over before you even start. It would have to measure, for example, the benefit that accrues from more people making video conference calls instead of travelling to meetings by plane. Or the energy efficiency gains that could be achieved by a community of houses hooked up to a grid network controlling electricity usage. Or the material cost savings from wholly digital versus material (DVD) delivery of movies. Ditto for newspapers, magazines and audio CDs. With cloud computing, storage costs fall too, as all media can reside on the network.

Then there is Telecom which has now belatedly decided it wants to be part of the government’s bold plan – offering to “structurally separate” to do so. Commentators have been quick to argue that to exclude Telecom would be terrible – leading to “a duplication of assets”. But it’s nonsense – Telecom’s assets will still be connected. There will not be two separate networks. By its very nature, the net is an interconnected mesh of copper, hybrid coaxial cable, fibre, and all sorts of other wires, not to mention all manner of wireless frequencies.

In fact, duplication on the network is good thing. The internet is built on multiple paths – a failsafe so that if one path breaks there’s always another route for delivery. As for concerns that “Telecom shareholders would end up with much less value in the two separate companies created by the split”, frankly we don’t care. This is the harsh reality of commerce in the internet age and companies, indeed industries, all over are dealing with the value destruction and opportunity, this new force in businesses brings.

That Telecom now finds itself at “a beggar’s crossroads” is entirely of its own doing. Its arrogant attitude towards consumers, and its refusal over decades to improve the public utility of its monopoly network, is what led to the government stepping in with its broadband investment promise. The government is doing what Telecom refused to do – speeding up the network at a pace that will quickly deliver benefit to all New Zealanders. That’s something it should be commended for, and so far, it has to be said, Communications Minister Steven Joyce is doing a superb job. Not only has he brought Telecom to heel, he’s also signalled a stop to the price gouging by the Vodafone/Telecom mobile duopoly.

The ultra fast broadband initiative doesn’t need Telecom. Telecom needs the new network – which it will have to connect to and pay for the privilege of doing so. That’s a highly desirable situation likely to bring true competition in the delivery of services. There are also plenty of others, like the Regional Fibre Group, (www.nzrfg.co.nz) ready, willing and much more able to deliver what Telecom has for so long failed to do.

As for concerns users won’t migrate quickly enough to give payback, there’s not much to worry about. The new network is like a massive oil reserve discovery deep underground. It takes time and money to tap, but once reached, riches flow. It’s a safe bet the internet will be with us for some time, making the new network a very sound investment – a gusher that will serve up huge benefits for a century or more.

> chris.barton@nzherald.co.nz

I would also recommend Paul Budde’s commentary today on the very “nail-biting” situation in Australia. The Australian Federal election in a few days time could have huge consequences for the NBN project.

Liberal’s hammered over broadband by their businesses constituency.

0 Responses to “FTTH Cost Benefit Analysis?”

  • With respect John people who think public network investments dont require CBAs don’t understand economics, democracy or the idea of informed consent (from taxpayers POV) either. Or to put it another way, playing elitist tech alchemist with other people’s money can’t sustain itself. Despite your assertions, CBAs can measure broadband externalities. A fairly worthy attempt at one is here: http://www.seattle.gov/broadband/docs/SeattleFTTNBenefits_091109.pdf It attempts to quantify benefits in health, congestion, productivity etc. If the Seattle City Council can do it for a $150m network surely it can be done for much bigger networks with national reach.