NBN economics: When cost becomes a factor

The real economic crux is whether the NBN will deliver more value than upgrades to the existing CAN

With the debate over the cost of the NBN raging at full steam again since the election, it's time to rethink the practical economics of such an ambitious project.

When discussing the cost-reach equation of the NBN, commentators must consider the line drawn by the original proposal.

Many people – most notably people in the opposition – make out as though the NBN is aimed at pumping fibre broadband along every dirt track in the country.

The NBN’s fibre is slated to reach between 90 and 93 per cent of premises. That was stated from the beginning.

Unfortunately for the people in the remaining 7 per cent it will be wireless, satellite or any left over copper.

Cost becomes a factor when it’s met with the practicality of the project. We could deploy fibre to 100 per cent of premises, but if it was going to cost $100 billion to do it then it becomes prohibitively expensive.

You can slice and dice the coverage to cost equation any way you like. How about 80 per cent coverage at $20 billion? Any takers for 50 per cent at $10 billion?

The real economic crux is whether the NBN will deliver significantly more value than upgrades to the existing copper network.

And as ACCC chairman Graeme Samuel rightly pointed out any cost-benefit analysis is likely to be rendered meaningless due to the sheer number of assumptions involved – not least the assumption that the project can be delivered on time and budget.

It’s worth noting here that talk about how the NBN will bring immeasurable benefits to schools, hospitals and industrial centres can’t really be taken as a serious argument for a greenfield fibre network. Why? Because a good level of fibre connectivity already exists at such sites.

Do we go to the trouble of laying NBN fibre to locations that already have fibre in order to “raise the bar” for broadband services or do we make the most of what’s already there?

The cost-benefit equation rears its ugly head again. Only this time it risks having its head chopped off sooner.

If the justification for an NBN is diluted at the enterprise level, then the debate moves to the small business and consumer markets.

Recent news from the island state suggests the take-up of the NBN has been less than enthusiastic. If only one in eight Tasmanians is electing to subscribe to an NBN why bother to deploy it to more than 90 per cent of premises on the mainland?

I won’t get into specifics about how those numbers can be interpreted, but what I will say is the lack of interest from consumers is likely to be the strongest case against an NBN.

When cable TV was rolled out in the 90s the public interest could have hardly been called revolutionary. In fact, many people protested against overhead cable lines in some suburbs.

Now people can get pay TV via satellite or DSL. Hell, you can even stream TV to your mobile phone if you’re so inclined.

But this debate isn’t about TV, it’s about connectivity. If it’s only a noisy few in the IT industry that want us to believe an NBN is essential to our economy and lifestyle, then where is the benefit likely to outweight the cost?

Consumers aren’t likely to benefit hugely from an NBN compared with copper-bound Internet services. Note, I said “compared with copper”, not “compared with nothing”.

Of course the NBN will be of benefit to households who have no broadband at all, but will it be so much more beneficial than other access technologies to justify the cost?

If it’s not the big business or consumer markets then perhaps it’s the small business sector that’s the dark horse in the whole debate.

Depending who you ask Australia has between one and two million small businesses.

Our army of small businesses equipped with a high-speed fibre broadband network may finally find a reason to whinge less about doing business in Australia and invest more – particularly those in information-intensive industries.

However, with many small businesses home-based, unfortunately we again run into the cost-benefit quagmire.

Like the Alice Springs to Darwin railway some infrastructure projects are done in the “national interest” rather than the immediate economics.

After all, there are worse things the government could spend our money on.

Rodney Gedda is Editor of TechWorld Australia. Follow Rodney on Twitter at @rodneygedda. Rodney's e-mail address is Follow TechWorld Australia on Twitter at @Techworld_AU.