I retired from personal blogging in July 2008.
But you can find me over at http://blog.xero.com.
Looking back at the broadband debate over the last year it’s amazing how we as an industry moved broadband from a technical issue to a business issue and now to a political one.
For me it started back at Foo Camp in February where a bunch of tech, political and media people got together. Following Foo, stimulated by meeting a bunch of people with big ideas I published a document entitled Securing Our Digital Trade Routes. It raised the option of state ownership of our national communications infrastructure. I was totally surprised by how far that went.
Two weeks ago it came together at the Digital Strategy 2.0 Summit. A lot of the ideas we as an industry have been pushing this year came out in David Cunliffe’s speech and Pete Hodgson a few days later. Broadband is the number 1 initiative in Governments economic development program.
The government is now talking how important international connections are and raised the possibility of debt funding.
Looking back, my state ownership model was useful as a discussion starter but my thinking has certainly evolved since February this year.
First a couple of building blocks …
The New Zealand Institute did the important work of developing the business case for Broadband. It made it quantitatively clear that there is a compelling business case for world class links within New Zealand and connecting New Zealand to the world.
Am I a socialist or a capitalist? Left or Right. This was a struggle. I like money. I think the environment is important. I believe we should have free health care and education. I think we need to grow the pie before slicing it up. I prefer small government, low tax. I think saving should be compulsory. Exporting is good. Thinking globally is better. The ‘Buy NZ Made’ campaign is dumb. I like Cunliffe, I like Key, I like Russell Brown. Maybe the term Digital Socialist is the best for me.
Did the market fail in the Telecommunications industry? No the market is always working – but the free market will give you certain characteristics that may not balance out other objectives. So I’m reconciled that the government can regulate to set market conditions.
Operational Separation and Structural Separation I’ve never felt comfortable with. It seems to artificially fight the market.
I caught up with a very smart guy called Shaan Stevens this year and he influenced my thinking more than anyone else. We had a good debate on my state ownership ideas. Shaan got me thinking about how matching the investment models might make the market work and provide the characteristics we need as a country.
I’ve been calling this Funding Separation. It goes like this.
- There is a public benefit of having best of breed broadband connections between New Zealand and the rest of the world. No one company can monetize that. Certainly not a public company like Telecom who exist to earn a return for investors.
- The Internet provides an opportunity to nullify the tyranny of distance between ourselves and international markets - to leverage our real competitive advantage: the close networks that form in a small country.
- To exploit the power of the Internet we need to connect ourselves digitally to the rest of the world and treat the Internet as an abundant resource where we don’t even think about cost. We need to build businesses on top of networks. We need to remove the network as a barrier - physically and costwise.
- Therefore what we need is an open access network that operates on a cost recovery basis between New Zealand cities and the rest of the world. (Incidentally I think the role of central Government is to connect the cities. Local bodies should pick it up from there). People expect to pay for the Internet. Cost plus is better than free.
- The cost of that network is probably between $2-3bn dollars. On a debt funded basis it would cost less than $300m per year to fund that. I am sure that even just the Government spend much more than that per year on the Internet.
- The Government could regulate that the infrastructure layer of this network can only be funded by debt and returns a maximum rate of return of say 8%. It could also commit that all Government traffic goes over this network. This is the Funding Separation bit.
- With the recent financial meltdown there is a flight to quality and strong demand for these types of investment products that return a safe long term return. Left just here the market may work to solve the problem. Telecom could also provide this network if they desired.
- With Kiwi-saver coming on stream there is a lack of large onshore investments the government could make. They could be a foundation investor.
So lets look at who’s impacted:
- New Zealand Business. Low cost connection to global markets. Winners.
- New Zealand Citizens. Boom times, we earn more, pay more tax ($’s not %), have better schools and hospitals. Winners.
- Telecom. Can play at both layers but no longer have to invest at the base network so can inject new services into the network as fast as they can market them. Winners.
- Government. Hasn’t spent any cash, has lowered their costs, have transformed the economy. Winners.
- Southern Cross owners. You’ve held our country to ransom for years you pricks and get what you deserve. Probably just make normal money now. Less winners than before but well positioned in their retail businesses so not losers.
There you go. Problem solved. Now lets fix the environment.
blog
Hi Rod,
This looks really good from a network level. I think its quite similar to what is happening in Scandinavia.
The thing that gets me is the ‘then what’ question. According to this http://www.nzherald.co.nz/organisation/story.cfm?o_id=207&objectid=10474456&ref=rss
BB pricing isn’t the inhibitor to us making the transition to a digital economy. Then i’ve got to believe its other factors. I wonder if we are not looking at this issue in its component parts and missing the holistic picture (i think biologists call it a System)
Having the links is like ‘building it and they will come’. I know it has to be there but other stuff needs to happen too.
Rod, of course you should have really waited until today to post this and then you could have discussed broadband prices going up -
http://www.stuff.co.nz/4318036a13.html
On fixing the environment you may have to work out the difference between actual global warming and rising see levels versus perceived global warming = tax increases. You never know, there could be a Nobel Peace prize in this for you.
Rod, I recognise myself in some of what you say: “but the free market will give you certain characteristics that may not balance out other objectives.”
Which is true. But the problem in this case was not some government initiative to spend money on a scheme where private investors wouldn’t invest. That usually it happens when it is a money losing scheme. But it might be of national interest.
The problem in this case was that private property was no longer sacrosanct. The government renationalised an industry. And the result of that is market uncertainty, not more investment. Because who knows what the government will do next? They might come up with a scheme that makes your investment worthless.
It creates an environment where competition rather lobbies the government to drag down or destroy a competitor, instead of investing in services.
So the result of all this will not be better broadband. Mark my word. And the article linked to by Dermott Renner is telling, isn’t it? For the last two years there haven’t been any improvements in my broadband service. Before that there were always changes: lower prices, higher speed, more gigabytes.
If the government had invested in infrastructure, that would have something I might have supported. But nationalising a private company is always bad. Give me a simple example where that has worked. Just something from the past 100 years. Whatever country. Socialism doesn’t work. It never has.
And guess what, just stumbled upon this in the NZ Herald:
Berend, true socialism rarely if ever works very well and has some major problems. The reason for the NZ government getting involved in this issue is not a government versus private company issue as I see it, it has had to wave the big stick because the one player in the broadband market has historically refused to provide the service to the level required. As Rod rightly says it is now a matter of national interest to the country as a whole.
A government being involved like this does work - Singtel is an example.
In a previous life I interviewed a lovely chap called John Third whose job is to break up former govt-run monopolies. I asked him about Telecom - read the interview here: http://computerworld.co.nz/news.nsf/news/ECBD4FBC63F7686FCC25715D007DC4F6
He made it quite clear - the problem is not with Telecom the Business trying to extract a certain level of money from its customers. The problem instead is that Telecom is two businesses each with a different funding model. Telecom retail wants to be dynamic, aggressive, to fight the fight and win in a highly volatile and potentially risky market.
Telecom Wholesale, however, (and here he’s including the network), is better served by a more modest, slow-but-steady kind of investor. No risks, not panic, serve all customers the same way and deliver to all on an equal footing.
Hopefully the new mood for investment will reflect that model. John Third was bang to rights as far as I can see, and a good 18 months ahead of the curve.
Cheers
Paul
Anyone notice that Shaan Stevens and John Third are both at Guinness Gallagher?
Clova Connect is a community owned and run wireless network connecting a remote rural community in the Marlborough Sounds to a kindly host in Picton who enables us to have an ADSL connection over her ‘phone lines. From knowing nothing about networking, let alone wireless networking, a year ago we’ve been able to move from a dial-up connection that could barely manage 2kbps downhill with the wind behind it for 10-minutes max to what must be the cheapest broadband in New Zealand at more than 4 mbps.
And what did the Govt. do to assist us? Nothing. What did local government do to help? Nothing. A sizable chunk of public money has been spend bringing fibre to Picton and can we access it? No. We could link our tiny local school wirelessly across our network to a larger one in Picton with all the unused bandwidth and it could access the MUSH (Municipalities, Universities, Schools and Hospitals) network through it, except that the powers that run the network say they might possible consider it - if we provide a dedicated, duplex wireless link for it, from a solar-powered mountain-top site!
We have developing vineyards, aquaculture ventures and world-class tourist lodges around the corner trying to earn export $$$ for New Zealand with woeful dial-up - the laughing-stock and despair of International visitors - and desperate to join our network, but having run into the brick-wall of fine-sounding but empty promises from Government, local government inertia and bureaucratic myopia we can’t accommodate them.
Government providing broadband? Yeah, right. Once you’re beyond the reach of the public sewers (let alone the tar-seal) if you don’t do it yourself it will never be done.
Private Enterprise is a great wealth creating system. But Utilities are, by nature, poor candidates for private enterprise. The free market model is predicated on there being a price point where consumers will go to a competitor or stop consuming at all. For utility services like roads, water, power etc replicating the incumbents infrastructure is completely inefficient and so rarely happens. As you can’t stop consuming a utility service without a significant devaluation in your quality of life there is no choice.
The same applies for data in NZ. Telecom is a utility. The owners of Telecom have been taxing NZ business since privatisation and will continue to do so until the government fixes the absurdity it created 20 odd years ago.
For my money we should take our lumps, buy out Telecom and return it to the SOE model that would have served NZ far better than that we have endured.
Air NZ’s bankruptcy would have cost the country billions. The privitisation of Telecom has cost the economy billions. Time to sort this out.
And another perspective….
http://diversity.net.nz/isnt-the-answer-mobile/2008/04/01/