NBN: demand-side folly or supply-side win?

NBN: demand-side folly or supply-side win?

Summary: The NBN has spent so much time as a political football that we've forgotten to think of it in the simplest terms: as a way to right the imbalance of supply and demand. Getting this wrong, as we've seen in other industries, can be disastrous, which should be reason enough to support making the right investment now.

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The resumption of healthy rainfalls in Victoria, which have pushed Melbourne's water storage past the 60 per cent mark, has spawned a quiet debate in that state over the wisdom of having committed $5.7 billion to build the massive Wonthaggi desalination plant — which, in a post-drought environment, is easy to portray as having been utterly unnecessary.

It sure didn't seem that way in 2007, however, when drought-stricken dams were plummeting towards single-digit capacity, livestock were living off the smell of a dusty trough and officials were handing out water-restriction fines if you so much as spat more than once a week. Perhaps that's why the inevitable questioning of the plant has been relatively muted: there was simply no better alternative, and despite its natural urge to attack Labor on every point, even Ted Baillieu's new Liberal government can't do anything but concede this argument.


If governments don't manage supply correctly, they might as well be heading over a waterfall in a barrel.
(Waterfall image by Piotr Menducki, royalty free)

The long-term effects of the desalination plant will be quite interesting. Although its construction cost has been linked to rises in water bills and its prodigal consumption of electricity raises its own issues, the volume of water that it's slated to produce — around 150 billion litres per year, or one third of Melbourne's 2007 water consumption — should fundamentally alter the dynamics of the water market in that state.

Basic economic theory suggests that prices will decline as the additional volumes literally flood the market, increasing supply by one third. Real life may, of course, prove differently; utilities of all stripes are experts at justifying what, these days, is a never-ending series of price increases, and they're hardly going to give the new water away, even though they almost could. With water distribution and retail managed by a collection of localised monopolies, there are none of the proper competitive-market dynamics in place to allow competition to force down prices.

Compare this with Victoria's electricity industry, which has seen no meaningful investment in increasing generating capacity for many years. The introduction of completion in the state was a good step towards the ideal of a perfectly competitive market, but without new capacity, all you end up with is greater demand for the same limited resource. Hit-and-miss discussions about clean-generation projects have had varied outcomes, but those patchwork solutions offer little real relief to the crushing reality that supply can barely keep up.

If you think of national broadband capacity as an aggregated market, there's no question that there isn't enough broadband to go around — and what there is has been controlled by a monopolist with little interest in unilaterally increasing supply.

Prices, as a result, have been skyrocketing, and will continue to do so unless someone can figure out a way to flood the spot market with excess capacity that will push wholesale prices to more reasonable levels. Remember when California ran out of electricity after profit-minded energy traders artificially reduced peak-time supply and bankrupted Pacific Gas & Electric Company with the resulting higher prices? Since retail prices were capped by the state, the increase in supply-side costs squeezed PG&E into oblivion, and threatened to do the same with Southern California Edison.

What does this have to do with the NBN? Everything.

For all of its ability to polarise political and technological discussion, discussion of the NBN's proper role as a government-owned utility has so far been primarily utilitarian: we need better broadband, the "pro" argument goes, so we can do lots of great stuff. But while this has been adequate justification for many onlookers, it leaves so many speculative questions open that anti-NBN types have been able to argue against the investment.

Yet if you think of national broadband capacity as an aggregated market, there's no question that there isn't enough broadband to go around — and what there is has been controlled by a monopolist with little interest in unilaterally increasing supply. As a result, well wired city areas get lots of bandwidth, those in poorly served rural areas get almost none, and nearly everybody else vacillates between best-effort sort-of broadband, and the frustrating depredations of RIM-blocked new suburbs, where there's barely enough bandwidth to send a tweet. And it takes half an hour.

How much more capacity do we need to ensure the utility of our broadband networks? The Labor government argues that the existing model is flawed, and that patching up the network here and there is simply holding off the inevitable. As more and more homes come online — and expect to be able to consume more and more bandwidth — aggregate demand on our national broadband infrastructure will increase, with prices slowly rising (as they recently did at Internode).

This is the kind of situation in which Victoria's electricity market now finds itself, and one which will be replicated in other states as Australia's hunger for power continues to grow. If you think the profit-minded private-sector owners of NSW's electricity assets are going to voluntarily flood the market with new capacity so as to keep prices down, think again: when profit is at stake, the government's goal of delivering affordable energy falls by the wayside.

What is the NBN, but a way to deliver the same sort of hockey-stick jump in broadband capacity that the Wonthaggi desalination plant, and ventures like NextDC's national facilities or Macquarie Telecom's $60m datacentre, will deliver in other markets?

Then, think about the fact that IT tends to invest in cycles. Remember how investments in datacentres boomed in the early 2000s, and then dropped off a cliff as the market waited for enterprises to soak up surplus capacity? Now consider how investment in datacentre capacity has gone through the roof again as newly virtualised companies look for a place to put their cloud-hosted services.

In this context, the need for the NBN is clear: what is the network, in the end, but a way to deliver the same sort of hockey-stick jump in broadband capacity that the Wonthaggi desalination plant, and ventures like NextDC's national expansion or Macquarie Telecom's $60m Intellicentre 2 datacentre, will deliver in other markets?

Sure, as in those markets, there is likely to be excess capacity on the NBN at first, but you can bet your bottom dollar that it won't last. This is supported by the latest Cisco Visual Networking Index figures, which suggest that the number of Australian internet users will grow from 14 million to 20 million by 2015, with IP traffic growing from 4GB per person per year in 2010 to 22GB per person in 2015.

Whether you trust those figures or you don't, the underlying assumption of rapid growth in demand remains inviolable. Imagine if water or electricity consumption were expected to grow by the same amount, and then consider whether existing infrastructure could cope.

When you look beyond the political rhetoric, the NBN is really, fundamentally about nothing more than investing now to meet demand in the future. The Opposition's NBN plan, which amounts to little more than wrapping the knee of an injured player and giving him a shot of adrenaline, is focused on trying to dance ahead of that growth curve; Labor's, on jumping way ahead of the curve and waiting patiently as demand catches up with supply. Just as in Victoria's water market, the cost of a guaranteed long-term supply may seem like a lot now, but as it helps us ride out the inevitable droughts in the future, we'll forget that we ever questioned it.

Topics: Broadband, Government, Government AU, NBN

About

Australia’s first-world economy relies on first-rate IT and telecommunications innovation. David Braue, an award-winning IT journalist and former Macworld editor, covers its challenges, successes and lessons learned as it uses ICT to assert its leadership in the developing Asia-Pacific region – and strengthen its reputation on the world stage.

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20 comments
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  • You can't say all that, David! That's taking the long view! And all this talk of future capacity? Heresy! Don't you know we shouldn't upgrade any physical assets until they actually decay into nothingness? Otherwise you're throwing away perfectly good capital assets. A dollar deferred is a dollar unearned etc etc.

    But seriously, a very good piece David. Important, if for no other reason that it actually expands the field of the debate (and heaven knows, we badly need to get past the stumbling-blocks and shibboleths of partisan bickering).
    Gwyntaglaw
    • Thanks for that. I think many are growing weary of partisan shibboleths and it would do us all a bit of good to step back and look at the forest for a little while rather than inspecting the saplings for rot!
      braue
  • An interesting but confused discussion of supply and demand.

    Utilities are not like selling t-shirts in a retail shop, so the dynamics are different.

    Supply.

    The increase availability of water does not necessarily impact retail prices or create a supply side push. There is no incentive to push more water out into the community. And there is no negative consequence of allowing a build up in supply. Why? Because water is a utility.

    Demand.

    It's foolhardy to suggest "there's no question that there isn't enough broadband to go around — and what there is has been controlled by a monopolist with little interest in unilaterally increasing supply". The level of private investment in telecoms infrastructure over the past decade has been impressive. The growth in international capacity has lead to significant price reductions. This is how ISPs continue to offer larger plans and lower prices.

    Water and electricity continue to increase in price, but broadband continues to decrease in price without any government intervention. Why? Because of investment in supply, not increases in demand.

    So what drives demand for broadband? Lower prices (unit cost reductions) lead to increased demand. (Jevons paradox might make some interesting reading for you).

    Suggesting that regional and rural areas are underserved because of monopolistic tendencies ignores economics. It comes down to return on investment. When entering a new area the costs are high, high costs mean high prices. High prices result in low demand and poor financial returns. This is why rural and regional areas are underserved. The best method to encourage high speed services to these areas is to subsidise backhaul (using programs like the blackspots program). Private investment in access technologies will follow without needing to build newer access networks.

    This isn't theory, we can see this happening around us:

    http://www.itnews.com.au/News/250938,iinet-nextep-deploy-dslams-in-geraldton.aspx

    Patchworks.

    The use of patchworks has become increasingly common as a method of contrasting the NBN with coalition policy. From a technology perspective, the 'patchwork' has been a feature of internetwork design from the beginning. The internet is by design a highly operational and capable patchwork, with a range of technologies produced by a number of different companies. There is nothing inherently bad about patchworks.

    The NBN is also a patchwork. it will consist of 121 layer 2 islands which will need to be connected back into a range of retail and wholesale service providers. Thats without considering wireless and satellite.
    rich__
  • I do not pretend to understand all the technical arguments about the ALP's version of the NBN and the coalition's "shot of adrenaline" alternative but this I do know: Australia can not afford to spend $50+ billion on this hapless project when there are a host of more pressing needs on which the taxpayer's dollars MUST be spent. I could list the most important of them but most of the readers on this site know well that what I'm saying is correct. The NBN is important and in 20 years time it might be very important but right now the cost is too great for the ultimate benefits delivered - assuming, that is, that even 50% of the touted benefits will be eventually delivered.

    So all you propeller heads and online gaming geeks you'll just have to put up with slower but more affordable speeds.

    Cheers
    Brianab
    • "Australia can not afford to spend $50+ billion"

      But we can afford $26 billion which is the correct number not the "yay I read The Australian!" inspired number.



      "there are a host of more pressing needs on which the taxpayer's dollars MUST be spent"

      Which are?



      "I could list the most important"

      List one.
      Hubert Cumberdale
      • OK Hubert - here we go:
        Homelessness - thousands of Australian citizens sleeping "rough" every night in our major cities.
        Aged care beds - thousands of elderly folk who have next to no hope of getting an aged care placement if they can not afford to pay the $1000s up front to one of the private sector facilities
        Elective surgery - tens of 1000s of Australian citizens (and yes, taxpayers) who have to wait months (sometimes years) for non life threatening surgery - hips, knees, backs, etc etc. Oh you'll say why don't they have private health cover - quite simple - they can not afford it.
        Public transport - our cities are grinding to a halt with congestion but we can not afford the light rail and other public transport alternatives.
        Mental health, indigenous housing, indigenous health, doctors and dentists in remote communities, dental health

        etc
        etc
        etc

        Hubert go figure
        Brianab
        • I dont disagree that the issues listed are extremely important and need attention. However there is a difference between capital investment & expense.

          The amount being invested in the NBN will be paid back resulting in a ROI, therefore being classified as an asset not an expense.
          No government party is going to drop $36B into healthcare, that we cannot afford. Good god, the uproar we went through by having the budget in a small deficit in recent years post GFC.

          By no means am I against any of the issues listed above, however the argument to spend the NBN on healthcare etc is an invalid argument.
          If you want more money spent on healthcare it needs to be taken out of recurrent expenditure.
          euro-1a025
        • "Homelessness"

          Explain how not building the NBN will help. If you think this is a higher priority then surely you could (as well as canceling the NBN) cancel a few state public transport projects to help right? This is more important than having a network of trains/trams/buses that gets people from point A to point B just so they can go to the movies.



          "Aged care beds"

          Explain how not building the NBN will help. etc.


          "Elective surgery"

          State issue.


          "Public transport"

          State issue.
          Hubert Cumberdale
    • "So all you propeller heads and online gaming geeks you'll just have to put up with slower but more affordable speeds."

      What about aussie small businesses trying to compete against other, overseas, small businesses online? Who is going to bother buying off a slow aussie site when it's just as easy (and as quick) to buy off a NZ/china/etc business?

      I always though the Libs looked out for small business, but their opposition to the NBN shows they only care about their "big" mates (and how short sighted they are)...post like yours saying that the NBN is just for "Geeks and gamers" is not only insulting, it shows a total lack of understanding as to how much business is done via the internet these days, if we want to compete globally, we have to have the global infrastructure to support that.....or we can just continue to hear about more aussie retailers going under....
      Tinman_au
  • Brianab, you obviously don't put any value on the digital economy and the benefits present & future. Your answer, wait 20 years and then see. All the while getting further and further behind.
    The poor state of Australian telecommunications relative to the rest of the developed world is a disgrace. God forbid we wait another 20 years with telstra in command!!
    I dont disagree that there are plenty of things that need attention however to ignore such an important part of our economy doesn't make sense. It seems that everyone keeps getting caught up in the capital cost & the ROI when making their argument however conveniently ignoring the benefits to the economy as a whole. The mining boom will not last forever, we need to start looking to the future!! What will we be left with in 20 years? A lot of holes in the ground, and a stagnant economy because we didn't look beyond the next 5 years and actually plan for the future.

    PS. You only highlight your ignorance by snide comments "propeller heads & online gaming geeks"
    euro-1a025
    • The point about the mining boom and what we will be left with as a result is an excellent one - so excellent that the Wall Street Journal recognised the truth of it:

      http://online.wsj.com/article/SB10001424053111904140604576493831749969702.html

      It's always the utter lack of vision that gets me about the conservative side. There's simply no concept of the transformative role that government can play in building infrastructure in areas where the market has failed to deliver. We will look back in 20 years time and shake our heads in disbelief that politicians could have been so petty, vindictive and small-minded. Truly, we will.
      Gwyntaglaw
      • There is no lack of vision from the conservative side - just a sense knowing that those who support bigger government are heading in the wrong direction.

        The vision of self righteous NBN sycophants is not a vision at all. It is a mere seld justified feel good upgrade at taxpayers expense.
        sachmodog
    • While not defending Brianab, I can't help but add on your comment: 'It seems that everyone keeps getting caught up in the capital cost & the ROI when making their argument however conveniently ignoring the benefits to the economy as a whole'.

      In my original comment I talked a bit about ROI, but this should not be considered a dismissal of NBN. It's merely a discussion around the merits of this story.

      Here's some more.

      When dams fill up, we don't decrease prices to encourage increased water usage. We throw water away, meaning it has no market value. In truth, we release the water into rivers with provides significant environmental benefits (much like the NBN will have HUGE benefits which aren't quantifiable). But that's not the basis of David's article.

      David also argues that electricity prices are rising because investment in supply isn't keeping up with demand. This also misses the point. David implies that if you increased investment to build additional supplies of electricity, that prices would fall. So costs increase but prices fall? It's not that simple. You need to increase the efficiency of the system to achieve unit cost reductions, not simply increasing the total supply to the market.

      Hopefully you can see that you can disagree with this article (particularly as it attempts to apply economics and hence opens itself up to discussion on ROI etc.) but still agree that the NBN is a good thing.

      Let's not get to the point where any article supporting the NBN must be right no matter what. David makes a number of bogus claims, such as that there is a lack of willingness to invest in broadband in Australia. It's not missing the bigger picture to point that out.
      rich__
      • Rich, I totally agree with you. It is good to finally get some discussion on the economics side of things. I was only really looking at the bigger picture in response to Brianab's comment and not getting into the finer economic theory as you had explained it very well.
        I just wanted to clear up that misconception that some people keep touting re spending the NBN on health etc. I don't disagree with anything you said, I however do disagree with several statements in davids article.

        Your comment on disagreeing with articles is spot on, I have been reading these forums for ages and only posted a couple of times, it seems that the argument becomes extremely yes or no with no middle ground for genuine discussion. It seems that all genuine rationale discussion on this topic has been jaded severely by the toxic political environment we now enjoy. We no longer have any visionary leaders! Just opportunistic fools who only care about being reelected and not benefiting Australia & its people.
        euro-1a025
        • Euro I do put a value on the digital economy but I contest the Gillard/Conroy view that if we don't do an NBN exactly as they propose in twenty years time Australia will be materially disadvantaged. I'm 70 years old and am living through the most amazing revolution in technology in history. Twenty years ago no one had heard of a mobile phone and wireless comms were a pipe dream. Can anyone seriously tell me that in the next ten years wireless comms will not have made massive leaps forward? Most people don't want fixed line comms now - certainly not my children and grandchildren. They all have their Apple PowerBooks, iPads ect and constantly have on line comms where ever they are. Sure they will not get a signal in the middle of the Simpson desert but 99.9% of the time they are not in the Simpson desert. Wake up! By the time the NBN has rolled out FttH to even 50% of Australian homes the technology will have advanced so much that the concept of running cables into homes will be largely obsolete. Twenty years ago the first thing a new home owner did was "get the phone on". Now most don't bother with landlines. Their mobiles are just fine. Of course business, government and utilities need high speed comms and fibre to their premises - no argument. But fibre down most back streets in Australia - give us taxpayers a break
          Brianab
          • Have a read of this to get an idea of the pros and cons of each system (wired vs wireless). http://www.circleid.com/posts/wired_vs_wireless_debate_becomes_a_core_policy_differentiator_in_a_national/

            Also keep in mind that available wireless spectrum is a limited resource ( http://www.wirelessindustrynews.org/news-jan-2010/1811-012410-win-news.html )

            There are some serious issues that need to be overcome for wireless to be considered a viable alternative to fibre for a widespread uptake of services. I've heard of a few projects that may be able to get around the limitations of available wireless spectrum/bandwidth (DIDO for example http://www.rearden.com/DIDO/DIDO_White_Paper_110727.pdf ), but a lot of them are "what if" and "one day", and several years (and possible even tens of years maybe), but until those are actually commercially viable, fibre (a technology that's been around since the _1840's_) is pretty well our only option to NOT actually be throwing money away...
            Tinman_au
  • I dont disagree there has been huge progress, however the whole wireless argument has been put to bed. So much so the liberals haves stopped using it as one of their key arguments, they have shifted closer to the NBN with FTTN.
    Trust me I am very much awake, I don't think it is very good policy to sit on your hands and wait for a magical technology to be developed all the while falling further and further behind the rest of the world. As you stated yourself the developments in the past 20 years have been huge and is only becoming more fast paced. We are already behind now, 20 years we will be off the page.
    The big picture economics are on the side of the NBN in what ever form we definitely need significant investment to bring us up to scratch and to push us into the future.
    euro-1a025
  • Euro; I do not dispute this: The big picture economics are on the side of the NBN in what ever form we definitely need significant investment to bring us up to scratch and to push us into the future.

    The key phrase is "significant investment ". My argument is nothing more than the huge cost of running fibre to 90% of private homes. A huge amount of the cost of the ALP plan will be laying cables, re-jigging Telstra's trenches, digging up verges and gardens ect running FttH. Surely FttN is good enough - let those who really do want fibre to their lounge rooms pay for it. Otherwise bring on the NBN just don't waste all that money running cable to at least 50% of the population who don't want it
    Brianab
    • "I'm 70 years old"

      I see...




      "the concept of running cables into homes will be largely obsolete."

      "Surely FttN is good enough"

      So one minute you are arguing that cables will be "largely obsolete" but you are also saying FTTN is good enough. If cables are going to be "largely obsolete" why would you endorse wasting money on a FTTN project?




      "Simpson desert but 99.9% of the time they are not in the Simpson desert"

      That's right 99.9% of the time they are either at home or work and still rely on a fixed line connection for their iPads etc.




      "let those who really do want fibre to their lounge rooms pay for it."

      I cant pay for the service until the infrastructure is in place.




      "give us taxpayers a break"

      From what? Paying taxes? Why are we paying taxes? Where is my money going? Why aren't these chimps improving communications infrastructure with it?
      Hubert Cumberdale
    • I commend you Brian for being 70 years old and still calling yourself a tax payer. But respectfully, I would assume you will be retireing soon? so your argument is somewhat irrelivant. If indeed you do value our digital economy you should be focussing more on how your grandchildren can make a living from the NBN. I'm sure they will tell you that their IPads access the internet a lot faster using a WiFi connection than their built in internet connection. An advancment in technology will have no effect on this (unless we choose to expose ourselves to greater doses of radiation?). It's pure physics. Being in the IT industry I can think of many ways that this infrastructure will benifit Australian businesses and I am currently working on several applications that require high speed broadband (focussing on cloud services). I don't believe wireless will ever give us this reliability. I too wish to work for as long as I possibly can (another offset to the price tag) and this infrastructure will hopefully give me that opportunity? And perhaps even your grandchildren?
      omega-b9c3d