11 August 2010

NBN: Better is not good enough

Yesterday the Opposition unveiled its alternative approach to Labor’s $43 billion fibre-to-the-premises National Broadband Network.

The Opposition is offering a $6 billion program based upon the existing copper wires, hybrid-fibre coaxial cable and wireless technology.

The Opposition is very proud of its handiwork. It considers that it has the superior offering because the outcome will be better connectivity than we have now, and the program is much cheaper.

The trouble is the Opposition is not asking the right questions. Apart from all the problems that its policy leaves unanswered concerning competition (they will leave Telstra owning the connection between the exchange and the premises), scarcity of spectrum and the need to repeal the laws of physics (they may not know it but they cannot do that even with the cooperation of the Senate), the aim of the game is not simply to make an improvement on what we have now. The aim of the game is to establish national connectivity as comprehensively as possible and to the highest feasible quality, which means wiring the country up with optical fibre except in the most remote regions.

The trouble with the Opposition’s thinking is that, not understanding the potentialities of the technology and apparently being uninclined to ask, they see the National Broadband Network primarily in terms of games and entertainment – they see us as spending $43 billion to enable country people to watch Big Brother in high definition.

The real point about transformative technologies like this is that once everyone has them they change the way we live.  When only a handful of people owned a car they just had a faster horse that didn’t eat hay. Once almost everyone had one, our whole way of life changed. Similarly with fixed line phones, mobile phones, passenger aviation, the household computer and a host of other things.

The thing to be considered once the NBN has been rolled out is all of the potential applications that might arise from the availability of that bandwidth to connect any two premises in the nation at very high speed.

And bandwidth is important, because it does not simply speed things up; the faster transfer transforms what is possible. You can move a pile of sand from one place to another with either a ten-ton truck or a wheelbarrow – the function is the same. The wheelbarrow is cheaper; the truck is more efficient.

But you cannot move frozen foodstuffs far in a wheelbarrow – it is too slow. And if you want to move a shipping container, the truck is better. No matter how many wheelbarrows you have, you cannot move a shipping container.

And so it is with fast broadband. The high resolution video that will be possible at 100Mb/s will transform medical practice, distance education, the gathering and exchange of scientific information and the way commodity and service markets operate, to name just a few. We can be sure that, once it is known that this level of connectivity will be in place, some very clever people will be turning their minds to smart ways of using it.

Perhaps the most important reason for committing to the rollout is the opportunities it will create for additional investment, because this is a technology that has increasing returns to scale.

Economics 101 teaches us about a world of diminishing returns to scale, a world in which there is effectively a fixed number of investment opportunities.  In this world, every time someone makes an investment in a factory or a power station or a hotel they use that investment opportunity up, and there are only less profitable investments left.

Sophisticated theories of economic growth teach us what the United States Congress understood in the nineteenth century – that many forms of investment create additional, not reduced, opportunities for investment. It was with that knowledge that they were able to incentivise the construction of the Union Pacific Railroad by making land grants to the proprietors as they rolled out the line. The railway line made the land valuable, and huge investment took place in its wake. The prime purpose of the Union Pacific Railroad was not to make money by selling tickets to passengers; it was about what the railroad would do for the United States at large.

In the world of Economics 101 few would want to invest in the United States – all the good opportunities would have been taken up already. People would instead be flocking to countries like Somalia, where all the good opportunities remain untapped.

In the real world, of course, everyone wants to invest in the United States and almost no-one would want to invest in Somalia, even if it were peaceful – the lack of infrastructure makes it a very unattractive investment proposition.

Finally, in a world in which technology is moving as fast as it is with information and communications technology, a whole-hearted commitment to the best that money can buy is the only approach to take.  And the Opposition is talking nonsense when it says that its proposed reliance on a suite of old technologies avoids the risk of putting all our eggs in the one basket by committing to optical fibre. The last time anyone thought like that was the American record company that sent away the man that came to them with the technology to make long-playing records; they said that LPs would never catch on and opted to stay with the 78rpm format. When a  new technology makes an old one obsolete, it is time to move on.

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