Thursday, 29 November 2012

NBN Co's bold assumptions on Australians' willingness to pay

Broadband has been a great deal for consumers. In most markets they have received ever more bandwidth for roughly the same amount of money, or even less. Many countries show a pattern of declining 'ARPU' (average revenue per user), and increasing average Mbps. Consumers may actively choose a plan that offers more bandwidth for a similar price, or they may be automatically upgraded to higher bandwidth by their ISP. (This latter is a surprisingly common phenomenon - the UK's Broadband Stakeholder Group has just published an excellent report looking at the numbers.)

Here's the pattern of price and bandwidth in the UK:

Source: Ofcom CMR 2012, p340

As you can see, the average spend for broadband has dropped by a third, even as average speeds have increased significantly. (Note that the speeds in this chart are 'headline' speeds - those actually achieved will be different, but the trendline will undoubtedly be upwards).

The historic picture in Australia is not quite as good as the UK, but nonetheless very positive for consumers, who have seen increasing speed for broadly flat spend:

Source: Telstra financial results, Akamai

[Some caveats: I haven't been able to find national average figures for ARPU, so I've used Telstra's number as a proxy. Given its significant share in the market and its role as a price setter, it is likely an accurate representation of the trendline, even if the overall average is somewhat lower. Figures for speed are in this chart actual speeds, rather than headline, so are not directly comparable to the UK figures above.]

What about the future? In Australia the broadband market is undergoing dramatic change. The government is rolling out the NBN, a (near) nationwide fibre-to-the-home network, which will wholesale services to retail ISPs. The business plan shows NBN Co making a slim return for its citizen shareholders, but of course a business plan is only as good as the assumptions that go into it.

What does NBN Co have to say about ARPU? They are forecasting a sustained and substantial increase over the life of the plan - the yellow line on this chart:

Source: Wholesale ARPU from NBN Co Corporate Plan 2012-15 p69,
Telstra retail ARPU as above, estimated retail ARPU author's estimate

Also on the chart is the Telstra retail ARPU, as before (in red), and my own rough estimate of what retail ARPU is implied by NBN Co's wholesale ARPU (in yellow - based on an estimate of $25 for the ISP to cover its costs and margin).

Note that NBN Co aren't saying that they will be charging more over time for any given product, or that those products will be more expensive than today's equivalent. What they are saying is that they expect consumers to be willing to pay substantially more to get higher speeds, with a result that the typical user increases their spend by about 70% over the next decade. While it is intuitive that consumers might pay more for higher speeds, as we have seen historically they haven't had to.

This is a very different point from saying that at any given point in time, higher bandwidth products are more expensive than lower speeds - of course that is true, but over time the price of all speed tiers have moved down. Consequently consumers can upgrade their speed without spending more money, and broadband's "share of wallet" has been roughly flat. The NBN Co plan critically depends on this long standing pattern changing dramatically, with a substantial rise in broadband share of wallet.

Saturday, 24 November 2012

What do innovators need?

I attended a fascinating Google/IPPR/Policy Exchange event this week. Broadly the theme was how digital innovation could deliver economic and social benefits.

The presentations were inspiring. They included a network for connecting developing world entrepreneurs with senior execs in MNCs; a crowd-sourced approach to cancer research; and an online provider of small business loans.

And guess what didn't get a single mention? Superfast broadband. It's an interesting contrast. When you speak to those rolling out fibre, they are keen to talk about all the applications it will enable. When you speak to those actually developing the next generation of applications, superfast very rarely comes up.

Don't think, by the way, that infrastructure was in some way an ignored topic at this event. The opening speaker (from Google) emphasised the importance of improving mobile networks.

Thursday, 8 November 2012

Fiber scepticism = climate change denial?

Polar bear annoyed by fibre sceptics
Paul Budde, the Australian telecoms analyst and FTTH enthusiast, has a feisty blog post up. In it he draws parallels between fibre-sceptics and climate change deniers, saying they're both mud-slingers who get far more attention than they deserve.

Paul complains: "So far we have not come across any NBN sceptics who have dared to move into the area of what the extent of the NBN’s potential – the digital economy, intelligent infrastructure, big data, clouds computing, e-health, e-government, smart grids and so on".

This is a surprising allegation, since there are plenty of people out there expressing doubts about these beneficial externalities, and I know Paul has read at least one such paper - the one I wrote (together with my brother). This addressed exactly the issue of superfast's potential, and spent some pages on why its contribution to e-health and smart grids has been much overstated. I certainly don't expect everyone to have read this paper, but I happen to know Paul did read it - he wrote quite a long response to it. Still, perhaps it wasn't interesting enough to stay in his memory.

Never mind, let's move on to some of Paul's other points. I'll set aside his unsupported assertion that less than 5% of commentators feel the NBN is a waste of money. His key points (paraphrased) seem to be:
  • 'We need to embrace the digital economy'
  • 'The NBN could create of millions of new jobs'
  • 'It will reduce healthcare costs by $30 billion and energy costs by $2 billion'
  • '119 countries around the world have national broadband plans, and everywhere but in Australia there is bipartisan support'

The Digital Economy
Certainly we need to embrace the digital economy - it's a bit of a motherhood statement. The critical question is whether we need superfast broadband to do so. The US, the economic heart of the internet and home of most of the major internet application companies, doesn't actually have particularly good broadband infrastructure. Akamai ranks it 9th worldwide for average connection speed. The UK has the largest internet contribution to GDP of any G-20 country, but is only just above the middle of the G20 pack in terms of average connection speed (among the countries tracked by Akamai). Thus there seems to be very little connection between broadband speed and strength of the digital economy. Rolling out fibre is simply not a magic economic wand.

New jobs
Paul's suggestion that the NBN could create "millions of new jobs" is certainly a bold claim to make without supporting evidence - total employment in Australia is a little over 11 million, so to add 'millions' by improving broadband speeds would be quite something. Paul's claim is all the bolder when you realise that of the 11 million, 3 million work in sectors such as agriculture, mining, public admin & safety, and health care & social assistance, all areas where the NBN is unlikely to create many new jobs.

Cost savings - healthcare
Indeed, if Paul is to be believed, there may in fact be job losses, since he tells us there will be huge cost savings in healthcare and electricity. Paul hasn't provided us with sources, so we'll need to do some guesswork in looking at these. He's been using the $30bn healthcare saving number since at least 2009, and I suspect it's from a 2007 KPMG report on the cost-benefit of electronic health records. This is not itself available online, but it underpins a key November 2008 Booz report on the potential of eHealth (see p35), for National Health & Hospitals Reform Commission.

The vital point here is that the number is not the benefit of NBN, but rather the benefit of eHealth. The vast majority of the benefits of eHealth do not depend on superfast to the home. They can be achieved via good broadband to medical premises (which generally already have it), and basic broadband to homes. Indeed, while the Booz report highlights the importance broadband, it absolutely does not highlight fast universal broadband as a requirement for the eHealth benefits. Indeed, it discusses Germany's substantial eHealth plan based on DSL. To say the $30bn eHealth benefit depends on NBN is simply wrong.

Cost savings - energy
Let's have a look at the $2bn energy cost saving. Again, Paul hasn't provided a source for it, but it is a number he's been using since 2010, when he said it stemmed from "savings from a duplicated comms network and double installation". Even then he didn't provide a source, so we can't directly review its basis.

However, there are plenty of figures out there for the cost of installing smart grids. Enel, the Italian electricity company, has installed 33m smart meters, at a unit install cost of €13 (derived from this). Scaling this to Australia's 8.7m households, we get a total cost of A$136m. While it's plausible that some joint roll-out of the NBN and smart meters might save some of this, clearly a percentage of $136m is not going to make much of a dent in the purported $2bn saving.

So perhaps most of it comes from avoiding a 'duplicated comms network'? The trouble is that smart grids absolutely do not require the bandwidth of NBN. They can work perfectly well on existing telecoms networks, and indeed the successful Enel network (completed in 2006, long before superfast broadband) does exactly that.

International bipartisan support
This leaves Paul's comment that there are "119 countries around the world [that] have national broadband plans, and everywhere but in Australia there is bipartisan support". Deliberately or otherwise, this statement gives the impression that Australia is in good company with its broadband plan - nothing could be further from the truth.

Firstly, in renationalising a substantial part of the telecoms indusrty, Australia has taken a highly unusual step. The great majority of countries (including all other OECD countries) that have chosen to support superfast have done so via commercial players. Even those that have taken parts of the network into government hands have done so on a far more limited scale.

Secondly the NBN is an extreme outlier in terms of the level of government investment:

Government spend from OECD

Given that the Australian government is spending so much more than other governments, surely it's not unreasonable to focus on costs, and to ask if the benefits will really outweigh them?

Oh, and for the record, I am a believer in climate change!