The proposed National Broadband Network

National Broadband Network

There is little economic case for the National Broadband Network. Government intervention in this industry will result in reduced innovation and higher prices, as this innovation will create a monopoly at the wholesale level. Broadband development will reach the vast majority of Australians without this intervention. In addition, the case is made that broadband is not a public good, so therefore should not be subject to this level of government intervention in the market -- market competition will deliver superior results at lower costs.

The National Broadband Network is a proposed $36 billion project that is considered by some to be a key infrastructure project that will improve Australia's competitiveness going forward. The project involves NBN Co, a company created with the objective of linking 93% of Australian premises to the network via fibre and the remainder via satellite and wireless links. The proponents believe that the investment will deliver significant economic gains; opponents argue that it is a poor use of public funds.

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There is little economic case for the National Broadband Network. Yoshino and Nakahigashi (2000) argue that infrastructure development is correlated with economic growth. The underlying principle is that the infrastructure represents a public good that is consumed by all members of society. Such development, therefore, has a net benefit for society. By providing the underlying conditions for economic development, the Australian government can encourage development and give the country a competitive advantage.

There is considerable question, however, over the degree to which the national broadband network constitutes a public good. Cowen (2008) points out that public goods have two main characteristics -- non-excludability and non-rivalrous consumption. Broadband internet is something that clearly does not meet the definition of non-excludability. It is easy to exclude non-payers or free-riders from consumption of the good. Moreover, broadband does not meet the criteria of nonrivalrous consumption either. Broadband can be delivered either over television cable lines, over phone lines, or via wireless means. Thus, competition in the broadband market can easily be fostered.

Armed with the understanding that broadband is not a public good, it is necessary to analyze the impact of government intervention in what would otherwise by a competitive market. In a competitive market, the different providers capable of delivering broadband would compete with each other to develop networks and sell to consumers. This would not only encourage innovation but would also encourage price competition. The result is that Australians would enjoy a high standard of broadband at relatively low prices. It must also be remembered that the country's population is clustered into major cities and regions of relatively dense populations. The five largest cities account for 60% of the country's population and a larger share than that of the country's GDP. If broadband delivers economic benefits to consumers and businesses, this high density will encourage the nation's potential providers to develop their infrastructure.

Government intervention in this market will have a negative impact. Some of these impacts can be seen already. Development of the infrastructure is slow, as politicians have difficulty making decisions and moving forward efficiently. Wired broadband is at the heart of the plan, yet most of the world is already moving towards a largely wireless platform for broadband, and consumer technology is supporting this (smartphones, tablet computers). NBN Co. is proposing itself as a wholesaler. However, the current proposal would put NBN in a monopoly position. Monopolies have little incentive to make investments in innovation, and have excessive pricing power. Government would need to ensure that pricing was not abusive, creating inefficiency. Without government intervention in the wholesale market, NBN would be able to charge monopoly rents for its broadband, to the detriment of service providers and consumers -- everybody would pay more for broadband than they would if they were in a competitive market. In addition, if having a modern telecommunications infrastructure is the social goal of this project, undertaking a project wherein innovation would be stifled is not going to achieve that.

The creation of a monopoly in broadband will reduce innovation and increase prices. This is a natural impact of monopoly conditions, as there is no competition to drive innovation or to bring down prices. There will be competition on the retail side, but NBN will have superior bargaining power. This will mean that resellers will have high fixed costs, reducing the impact of competition on delivering lower prices to consumers. This market inefficiency will also serve to reduce the demand for broadband. Despite the monopoly in the industry, some consumers will simply choose to do without. The government is only providing the infrastructure with this program, not forcing consumers to purchase. Thus, the government may fail to meet its stated objective of delivering broadband to all Australians, by virtue of the fact that it is creating conditions that will encourage larger numbers of Australians to forgo broadband.