The Pencil Guy: Hourann's illogical blog

By request: an assessment of Labor’s broadband policy

My initial reaction to the Ruddster’s announcement from a week ago (and yesterday’s radio ad) was exactly what the Labor strategists wanted: “wow! faster Internet! that’s cool!”

But on closer scrutiny, I’m not so sure that spending billions of public dollars to cover the country with fibre to the node is the best way to go about fixing the problems in Australia’s broadband. After reading Joshua Gans and Ross Gittins, I’m thinking it’s a step in the right direction, and way ahead of what we’ve seen from Howard so far, but also not the best possible decision.

The “wow!” factor can be found in the hearty responses of both Telstra and Optus, as well as more than a few bloggers: Tim Dunlop reckons it’s vital infrastructure for future growth, Kim at LP and Fred at Troppo argue that this is a sound investment, and Aussie Bob describes how the Liberals have been left scrambling in Rudd’s wake.

A rundown of the plan: the successful private tender will get partial government funding to kit out cities and towns with street-side boxes linked by gigabit fibre, and ISPs will be free to sell ADSL2+ on existing copper from those ‘nodes’ to your house. $2.7 billion of the $4.7b public slice will come from the same Future Fund that’s ahead of schedule (even though much of it is in underperforming Telstra shares).

This is an improvement on existing ADSL, but isn’t any great leap forward in technology (though it could be a stepping stone to the Holy Grail, fibre to every home, as seen in Asian cities). Celebration will come from the huge numbers of people in urban fringe or semi-rural areas who are out of range of a DSLAM. The remaining people in more remote areas (150-ish thousand households) will get thus-far unexplained upgrades to Internet service, possibly via HSDPA wireless (i.e. Telstra’s pricey “Next G”).

The question is, why not just directly fund those last two groups of people, rather than the entire country? Here, I think, is where political considerations enter: for starters, that’s the ostensible aim of several current programmes, which haven’t done that well. Also, Labor might be afraid that funding for regional areas (rather than the whole country) will invite accusations of pork-barrelling. Given that FTTN is the most logical technology for country towns without ADSL, a targeted rollout would mean that those folks would get better Internet connections than voters in the city (and there are a lot of towns to fix). Politically speaking, it’s probably simpler to pony up some more cash to bring everyone to one happy minimum standard rather than trying to patch up the areas that really need help.

The most compelling critique of this comes from Joshua Gans, who points out that this kind of nationwide investment is expensive, and probably isn’t needed. I think he underestimates the importance of connection speed for uses like monitoring sick people or delivering education to people in remote areas (working with these guys taught me about the latter), and Peter Martin makes a similar mistake. But they’re both on to something in suggesting that faster broadband is urgent-but-not-that-urgent — most online services require only “standard” broadband because that’s what the majority of US consumers have, and therefore that’s what Silicon Valley companies develop for. I’m not sure we’d get any benefit from being ahead of the US on this one.

The obvious response, “why wait for the Americans to develop services?”, has a simple answer: our copyright laws and small business regulations make it awfully hard to do that kind of innovation in Australia. So this is an example of Labor’s propaganda (“entrepreneurs will miss the chance to take part in the earliest stages of industries that will in time be worth billions”) being overblown. In addition, this isn’t an argument for covering the whole country with fibre — we don’t want to lure technology companies to Meekatharra, we want to lure them to Perth. Other flaws in the policy document include its use of old data in its case about falling behind globally, and its ignorance of the main reason for low average broadband speeds — namely that there’s little usage of cable or ADSL2 when Telstra can still make money selling people overpriced 256k.

Telstra wanted to fix this last year by replacing its copper network with FTTN, but the plan would have cut off competitors like iiNet (because there’d no longer be copper running out of exchanges where they’ve installed DSLAMs). Unsurprisingly, it failed to get past the ACCC, and Sol has been bitching about it ever since. With this in mind, maybe a better solution would be a regulatory system that encourages both big and small players to deliver fibre in smaller chunks, such as by letting home builders choose a provider to install fibre lines right now, rather than new Telstra-owned copper.

That said, Labor’s policy will achieve similar outcomes — if the new network has a different ownership structure to the existing telephone system. Something like a separate holding company, partly owned by the telcos using it, would be perfect (like how the credit card companies are owned by participating banks, or how our international fibre is laid by consortium).

Second-best would be to separate the companies that sell service to homes from those wholesaling bandwidth to companies (like what the WA Government has tried to do with electricity). The ideal method would have been to split Telstra into a networks company and a retail company before selling it off, which has been mentioned many times. But that horse has bolted and I don’t see any prospects for forcibly splitting Telstra as long as Sol is still in the country. Rather, I see hope that this FTTN plan could give us a new network to replace all but the last kilometre of Telstra’s copper, and if that’s owned in a non-Telstra structure, that’ll give us de facto separation.

There are big gotchas to be had in that this is a public-private partnership (not exactly fashionable right now), and that it’ll be necessary to strong-arm Telstra to get access to that last kilometre between the node in the street and your house. But I don’t think these are insurmountable, which is why I’m prepared to give this proposal conditional support.

I was asked to assess this policy on the grounds of whether it’s a good reason to vote Labor, and since it’s an improvement on the status quo (notwithstanding devils and details and so on) I have to say that it is, at least for now. It’s far from the ideal policy (and there are plenty of better reasons for voting one way or another), but I don’t see anyone in Howard’s cabinet being willing to deliver the regulatory changes and directed spending that are really needed. There’s a chance that the Liberals could take over as “the party for faster Internet!” … but it’s not likely.

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