2010 Buyers Guide - Broadband Properties

would most likely be dwarfed by other
factors, especially market structure and
competition, or the lack of it.
A key market structure factor is
the extent and nature of competition
between wholesale and retail levels in
the supply chain. Alternative market
structures include vertical integration;
the opposite, where there is separation
between wholesale (network) and retail
ends of the market; and some hybrids in
between. These different market structures
also imply differing approaches to
regulation.
In general, competition makes a difference.
Although the introduction and
maintenance of competition through
regulatory arrangements, including
third-party access to infrastructure,
particularly network infrastructure, in
industries such as electricity, water and
gas, aviation and others has not been
perfect, there is compelling evidence
that it has brought significant economic
gains to Australia. This is reflected in
lower prices for services, sustained investment
in provision of services and
sustained growth and employment.
Without competition in the access network,
the monopoly telecom provider would charge
higher prices, increasing the cost of the nextgeneration
network. In effect, the community
would pay for the network many times over.
Less competition in the provision
of genuine broadband services can also
be expected to make a difference. The
CIE recently undertook an analysis of
the economic cost of differing market
structure, competition and regulatory
arrangements for the proposed National
Broadband Network (NBN). The analysis
showed that a market and regulatory
structure that permitted the exercise of
market power through vertical integration
and allowed the operator to obtain
a relatively high rate of return on equity
(“north of 18 percent,” in terms of the
debate currently in Australia) would
lead to a loss of GDP of around 0.36 per
cent given a network cost for the NBN
of say, $15 billion.
Relative to the size of GDP this year,
this has a value of around $4 billion and
is about a quarter of the benefit expected
to be gained from use of genuine broadband.
The losses would be larger in proportion
to the actual cost of the NBN.
The real cost of failing to obtain substantive
competition where it could exist
in provision of genuine broadband is
that the economic activity foregone due
to having a higher-cost economy would
equal the cost of the initial network in
five to six years or so. When considering
that the NBN would be in use for 20
years or more, this suggests that the real
cost would be three to four times higher
than the initial network cost. With less
competition, the community would pay
for the network many times over.
Summary
• Widespread access to and use of
genuine broadband would expand
economic activity – an increase of
around 1.4 per cent of GDP could
be expected after about five years.
• Structural changes will also be required.
Some industries will be bypassed
while others will expand, reflecting
income effects.
• The benefits will be lower with less
competition and there would be
higher prices for genuine broadband.
• With less competition and with
prices that reflect a degree of monopoly
power that provides high returns
to shareholders, the economywide
loss of value would equal the initial
network cost every five years or so.
This means that over a 20-year operational
life the economy would pay
a cost roughly equal to three to four
times the original cost. BBP
66 | BROADBAND PROPERTIES | www.broadbandproperties.com | November/December 2009