Editors note – the following is a reprint from The Independent Financial Review – It is an interesting counterpoint to the current broadband discussion taking place in New Zealand

There has been more baloney than usual in the media lately about New Zealand’s internet infrastructure – or the lack of it. Much of this is driven by a report from the New Zealand Institute which put forward a worthy-sounding plan to ensure that 75% of the population is linked up by fibre optic connections within 10 years.

That’s not a bad goal, however the way NZ Institute boss David Skilling proposes to achieve this is by appropriating Telecom’s last mile company Chorus, along with the local assets of other Telcos, to create a price regulated government monopoly that will provide all the links between premises and telephone exchanges throughout the country.

Think of it as Stalin meets ‘Think Big’.

And the carrot for doing this? Apparently a benefit of $2.7 to $4.4 billion per year to the New Zealand economy. That’s an enormous benefit but the Institute assures us it will happen due to tele-presence (whatever that is) and the gravity defying Weightless Economy.

If the NZ Institute is really recommending that Government grab people’s assets, and create a monopoly one would expect it would have some pretty solid arguments to support its case. But sadly, while the supporting arguments may hold some credibility in academic and economic circles, in the real world they simply don’t pass even a basic common sense test.

Let’s look at their proposal in a little more detail. Firstly they plan to grab the fibre-to-the-premises assets of all the competing Telco’s in the metro areas, then roll fibre out into the suburbs to pick up 75% of the remaining premises’.

This leads directly to the first flaw in their argument; the institute fails to realise that almost all economic value is created in businesses not in homes. At work the internet is a great productivity tool, in the home it’s largely an entertainment medium. The Institute’s plan is to kill competition in the business districts of the country to ensure a rapid deployment of fibre in the suburbs. You’ll be able to download Trade-me and You-tube faster – but where’s the value in that?

To be fair though some value is created by people who work from home but for the vast majority of those people the existing copper networks do the job just fine. On the other hand most urban based business can already get access to fibre. The competition is growing in the major centres there are up to four competing fibre providers and competition even exists as far a field as the West Coast so it’s hard to see where $2.7 to $4.4 billion of benefits per year will come from.

To add insult to injury the Institute plans put the rural sector, where much of the real value is created in the NZ economy, in the ‘too hard’ basket. Most farms for example will fit into the ‘other’ 25% that won’t be served within the next ten years.

The institute believes that fibre is a commodity that isn’t differentiated so nothing significant would be lost by having a monopoly providing a homogeneous service.

In practice nothing could be further from the truth. In the many centres were competition exists IT managers make their decisions’ by considering factors such as network diversity (should I use one provider or keep them honest by using two), network design (stars and circles are popular and have different price/performance characteristics), reliability (some operators fix things faster than others) and of course price.

Under the Institutes plans competition based prices will be replaced by prices incorporating a guaranteed, government regulated profit margin.

It’s hard to imagine how these consumers could possibly benefit.

Having created a monopoly the Institute then proposes that telecommunications companies lease fibre infrastructure from the monopoly and create their own services on top. Mr Skelling cites the city of Amsterdam as an example of where this model has been deployed. The writer has been unable to track down any independent research that quantify’s the benefits to Amsterdam of this adventure. In fact he rather suspects that the plans were hatched in one of Amsterdam’s famed ‘coffee shops’.

The fact is that so called ‘Service Based’ competition in telecommunications simply doesn’t work. This is because at the so called service level it’s almost impossible to differentiate telecommunications services. The cellular telephone market is a high profile example of where billions of dollars have been lost by companies trying to build Service Based business on top of third party infrastructure. Disney for example failed when it developed a Service Based business to market cellular services to kids – the kids stuck with their existing operators and Disney gave up. A viable telecommunications company needs infrastructure and services to succeed.

A proposal that forces companies to divest their assets, destroys a vibrant competitive market, and creates a monopoly is not something that should be considered lightly.

These are activities that strike right to heart of our economy and our society. As a prerequisite to such a radical proposal you would have expected to see real market failure and obvious economic benefits accruing from any subsequent proposal.

In this case the NZ Institute has clearly failed to demonstrate either, market failure or clearly defended benefits. The market for last mile network services is competitive, dynamic and growing at a pace that meets customers’ demands and the benefits from their monopolistic proposal are opaque at best.

By David Ware

Managing Director TeamTalk Ltd

www.teamtalk.co.nz

3 Comments
  • David Ware is downbeat on the economic value created by piping fast Internet to the suburbs. In some respects I agree, but in other ways I do not.

    It is true that there exist a number of prominent firms in suburban locations that have simply made their own arrangements for real broadband access to support their business operations. It is also a fair comment that a faster suburban network will simply lead to more bandwidth taken up by consumers of entertainment. I also agree that the majority of us, who work from home at times, simply do not require vast amounts of bandwidth to surf, get email and send Word documents.

    However there is a bunch of arguments in the other direction. For example, the fact that we need a reasonable level of bandwidth to compete with other countries around the Asia-Pacific region in terms of attracting creative, skilled (and discerning) labour. Secondly, if suburban consumers have better broadband, doesn’t that create an opportunity for local service providers to create new games and applications to service that market? Finally, other nations have demonstrably leveraged ubiquitous broadband to project their culture onto the global stage and hence attract tourism and business investment opportunities.

    What these conflicting arguments demonstrate is that we now need a proper economic analysis of the issues to be carried out by an independent body and funded by central government. Any such analysis must also consider the social costs and benefits of capital expenditure on such a project. Such analysis has been sadly lacking so far. For example what is the opportunity cost of spending money on fibre instead of on health or education? Also, what are the implications for our children if they spend more time in front of the computer or have better access to violent online games or pornography?

    The “weightless economy” is a catchy phrase. But what does it really mean? The real issue is ensuring faster and cheaper international connectivity so that we can host and manage the next Youtube in downtown Wellington and still attract a huge global audience.

    http://geniusnet.blogtown.co.nz/category/broadband/

  • Falafulu Fisi |

    Asset grab no solution for internet infrastructure.

    Davidware, I would modify your title to:

    Asset theft no solution for internet infrastructure.

    BTW, good points.

  • Paul Spence.

    “..What these conflicting arguments demonstrate is that we now need a proper economic analysis of the issues to be carried out by an independent body and funded by central government. Any such analysis must also consider the social costs and benefits of capital expenditure on such a project. Such analysis has been sadly lacking so far..”

    You’re a consultant. The last bloody thing we need to more bloody plonkers talking about how big and how wide the widget should be. We need more people who actually know how to build widgets and we should be paying them to build widgets. The last fucking thing we should be doing is paying plonkers to talk about widgets. Especially with taxpayer money!

    fuck off with your silly fucking ideas. Too much talking. Too much analysis. Not enough action!

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