2010 Buyers Guide - Broadband Properties

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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
Broadband and the Economy: The Big Picture – In Short A roundup of recent findings about the relationship between broadband and economic conditions worldwide. Broadband’s Benefits Rise With Use Two new studies show that broadband’s economic effect isn’t a straight-line function. Rather, the more widespread and heavily used broadband is, the more important it becomes to the economy. Pantelis Koutroumpis, a Ph.D. student at the Imperial College Business School in London, compared the growth rates of European Union countries over the middle years of this decade. Koutroumpis won an award for his work at last year’s Biennial International Telecommunications Society Conference in Montreal. Koutroumpis tried to capture what he calls the “two-way relationship between growth and broadband infrastructure” – that is, to find out both how economic growth creates demand for broadband and how broadband infrastructure creates growth. He found, of course, that wealthier, better educated and more urbanized countries have more demand for broadband services. But independent of this, he found that adopting broadband boosted a country’s overall economic growth: Every 1 percent increase in the broadband penetration rate increases economic growth by an average of 0.038 percent. Given that broadband penetration in Europe increased by 27.5 percent over the three-year period studied (therefore increasing growth by 1.05 percent) and the overall economy grew by about 12 percent, broadband adoption accounted for close to 10 percent of Europe’s economic growth over the period. Broadband’s Critical Mass When he looked more closely at countries that have different levels of broadband penetration, Koutroumpis found that broadband adoption had the most impact in the countries that already had the highest broadband penetration. Once broadband penetration reached about 50 percent of households, a “critical mass” effect made broadband even more valuable. In high-broadband countries such as the Netherlands and the Scandinavian countries, broadband adoption boosted the economy by about 1 percent per year; in countries with low broadband penetration, broadband adoption boosted the economy by only about half a percent per year. Koutroumpis says, “Put simply, once more than half the population has access to broadband, returns to the economy at least double, when compared to countries with lower broadband access. This has important implications for regulators and policymakers in the developed and developing world.” Broadband Needs an Ecosystem Another study to examine this relationship is “Economic Impact of Broadband: An Empirical Study,” published by economic consulting group LECG and commissioned by Nokia Siemens Networks (available at www.connec tivityscorecard.org/images/uploads/me dia/Report_BroadbandStudy_LECG_ March6.pdf). Like Koutroumpis, the LECG authors found that broadband’s impact varies among countries. In their view, impact varies according to how well societies use their broadband capacity. Businesses more dependent on IT benefit more from their broadband connections. In countries using a lot of technology, every percentage point increase in broadband penetration increases productivity by about 0.1 percent. In the United States specifically, the growth in broadband penetration between 1999 and 2007 appeared to account for about one-eighth of productivity growth over that period. Impact on GDP of Future Increases in Broadband Penetration In Countries With High Technology Use (Millions of 2000 US Dollars) Country 1 Percentage Point Increase 5 Percentage Point Increase 10 Percentage Point Increase France 1,769 8,846 17,692 Finland 157 783 1,567 Germany 2,023 10,115 20,229 Sweden 274 1,368 2,736 UK 1,845 9,225 18,451 US 11,528 57,640 115,280 Source: LECG November/December 2009 | www.broadbandproperties.com | BROADBAND PROPERTIES | 67
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