It’s not actually true that people Down Under are upside down, but there’s surely a possibility that their regulatory approach to broadband is both upside down and backwards.
In fact, Australia could be the place that proves that too much competition is a lot worse than too little -- something we need to be thinking about here in the U.S.
The problem is that Australia’s economic density is so low that it’s hard to be profitable on services, even with full retail pricing. The regulator there, the Australian Consumer and Competition Commission (ACCC), is primarily a consumer protection agency. Wholesale requirements set by the ACCC killed any incentive for private companies, including Australia’s national carrier Telstra Corp. Ltd. (ASX: TLS; NZK: TLS), to invest in broadband. That left Australia really behind in broadband, and to catch up, the government proposed a “New Broadband Network” (NBN) funded by taxpayers.
So regulation messes up and the taxpayer bails broadband out. Sounds like the stimulus package, huh?
The NBN would be built and run by a consortium, and the government actually disqualified Telstra from bidding on the deal. Killing the bidder with the most experience would make it harder to deliver broadband at the price the government set, but they have a solution. The government now wants Telstra to divest itself of its access network and give it over to the NBN consortium, to be shared by all the competitors. If Telstra won’t go along, the government is threatening to bar Telstra from bidding on spectrum for wireless in Australia.
Australia may be an example of regulation gone mad, but how mad would regulation have to get before ISPs lose interest in building broadband?
Here in the U.S., financial analysts are already saying that capital expenditures by ISPs will be down in 2009 and also in 2010. How do we expect there to be broadband growth? More importantly, what will it cost if we have to go Australia’s route to fix it?
One way of judging is to look at a comparison of the Australian NBN plan cost versus Australia’s GDP and then apply that here. The current Australian NBN cost estimates are about 5 percent of the country’s GDP. In a U.S.-sized economy, the total would be $800 billion, more than the whole U.S. economic stimulus package.
Another approach would be to use our existing rural broadband stimulus package as a basis for factoring. That package applies almost $8 billion to subsidize rural broadband service -- when broadband is already available except in two-tenths of one percent of zipcodes -- meaning one zipcode in 500. To cover all the zipcodes, we’d need 500 times $8 billion, or four trillion dollars!
The lesson here is that more broadband deployment, and better broadband services, will cost money that somebody has to provide. We in the U.S. risk carrying our desire for free stuff, or cheap stuff, too far -- just as they’ve done in Australia.
We want mobile rates to fall, and we want 4G and ubiquitous mobile broadband at 100 Mbit/s. We want high-quality, net-neutral, Internet bandwidth, but we’re not willing to pay incrementally for it. We want what those Australian regulators wanted -- a big win for the consumer, which is us.
Like Australia, we may end up with a big loss for the taxpayer, which is also us. At best, we could threaten broadband expansion without some smart policy that creates a win-win for consumers and providers.
There’s still time to think about a rational broadband strategy that actually makes money for providers and doesn’t require a stimulus-sized broadband bailout. But there’s not much time; the FCC’s debates on the issues will likely set U.S. policy by this time next year.
Net neutrality needs to be part of the discussion and debate, but so does net profitability.
— Tom Nolle, software engineer and founder ofCIMI Corp.
Interesting article. I work at the telecom regulator of the Dominican Republic. We have a broadband development program as well and from what I've seen, having the incumbent ISP participate (and even more, win the contract) is the best thing that could happen. They have the know-how which is their biggest asset in those cases, while new companies might have the good intentions, the big ISPs have a solid infrastructure to work on, and people to make it work.
I don't want to confuse subsidies with the early PTT integration of EU telcos. I'm not a big fan of the whole privitization or deregulation thing, either. My own view has always been that telcos worldwide should have remained public utilities. The problem is that we've left that option behind at this point and so we're going to have to make the best of our current situation.
I can't argue your point re Telstra profits because I don't have the data to support any position, but I think that if excess profits do exist, a tax is the best solution. Taxing profits can be deferred if the company makes a broadband investment.
Tom, a big call "I don't know of any successes to the direct subsidy approach at any scale, anywhere." Firstly it might just ignore the history of European and British Empire telcos built by Governments. It is a potentially mute point because the PMG in Australia was self-funding from 1959 - and Telstra repaid all the outstanding debt prior to its privatisation. The Australian Government raised $80B from selling an asset whose carrying value was zero!
Secondly, just because the Government has announced that it is going to take the lead role in the NBN does not mean it is going to "subsidise" it. It might look like a subsidy in the short term - but only because long run investments are really hard to get up in a capital market. Or if you do you vest them with a monopoly right - and in a case of private investment that equity then attaches a "market risk" weighting determined by econometric studies to determine cost of capital. But the premium isn't fopr risk, it is a premium for rent - but as the WACC for regulatory proceedings is determined by investigation of market returns you wind up factoring it in - so lo and behold a regulatory proceeding concludes that there is no super-normal profit.
I can assure you there are super-normal profits in Australia - unfortunately Telstra got privatised (from 1997 to 2005 in three tranches) through a process that saw the rents capitalised.
The FCC, under law, has preeminent jurisdiction on telecommunications issues wherever it elects to assert its authority. That was decided by the Supreme Court in 1999. While there is state PUC regulation it occurs only insofar as the FCC doesn't elect to step in.
Super-normal profits don't exist in the US telecom industry; you can pull the regulatory filings with the Securities and Exchange Commission and find the information on each provider's website. The telcos are still responsible to the Federal Trade Commission for monopolistic practices too.
I'm not picking on regulation in Oz. I've given lectures there on regulatory policy and broadband and telecom investment (in three cities, including Canberra) and consulted on the topic as well. I've talked to people on both sides. I've followed the current NBN debate, including downloading both the government solicitation and the key responses. This process has evolved over the last four or five years, and I think it's heading in the wrong direction. New Zealand's regulators and technical media have a similar view, and so do many in Australia. Government regulatory policy isn't an exact science. For eight years after the Telecom Act was signed here, the courts upset every single FCC order implementing it and finally essentially threatened to direct the FCC to set a specific policy. Things don't work well here all the time, either. They may not work well with the new set of rulemakings here, too. But the worst failure telecom regulation can produce, in my view, is to create a situation where direct taxpayer subsidy payments are required. If you have to stimulate the industry you do it indirectly through tax credits and universal service funds. I don't know of any successes to the direct subsidy approach at any scale, anywhere. I don't think our Rural Subsidy program will be one, and I don't think NBN will be one either.
In respect of the telecommunications specific powers of the ACCC its objective is framed in terms of the long-term interests of end users, this test has three limbs (1) promoting competition, (2) any-to-any connectivity and (3) the economic investment in and utilisation of infrastructure. The ACCC carefully balances all of these, successfully I would claim.
The authority of the FCC is expressly limited by constitutional limts on Federal authority, and hence you still have telcos subject to regulation by State Utility commissions. These entities do not exist in Australia - and hence my concern about the phrase "federal authority" in an earlier comment.
The "health of the industry" is not promoted by allowing incumbents to earn super-normal profits.
Actually I'm not a reporter but a consultant/analyst. My biggest challenge is to analyze and not personalize and I'd like to think I succeed most of the time! However, that's for people like you and others who read this to jusge.
I'd like to see more local and regional initiatives too, as long as they're well thought out. Let's hope that all the debate synthisizes some rational views and rational policies.
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