In last month’s federal election in Canada, the nature and form of political inroads into mobile telecommunications market regulation was a hot-button topic. However, in comparison to the policies of one of the protagonists in next month’s British election, the Canadian proposals now appear quite modest.
The opposition Labour Party, under Jeremy Corbyn’s leadership, has announced that it will nationalize BT’s Openreach network if elected. Openreach is the firm spun out of and legally separated from the privatized, formerly government-owned Post Office telephone network (BT) that provides consumers with regulated wholesale access to fixed-line broadband infrastructure. Furthermore, the party’s Shadow Chancellor John McDonnell promised that the nationalized firm will provide free full-fiber broadband to every home and business in the UK; that is, “not just any broadband, but the very fastest . . . full-fiber broadband to every home, in every part of our country, for free.”
Corbyn backs the policy with claims that “this is core infrastructure for the 21st century” and “it’s too important to be left to the corporations.” He and McDonnell have claimed that the annual operating costs can be paid with selective taxes on web companies such as Amazon, Facebook, and Google. They suggest the fiber network can be rolled out for an extra £15 billion capital expense over the £5 billion pledged by the incumbent Boris Johnson–led Conservative government for subsidizing the provision of broadband connectivity in under-served (mainly rural) areas. However, BT Chief Executive Philip Jansen estimates the ambitious plan would cost nearly £100 billion.
Corbyn has invoked the rhetoric of the UK’s allegedly glorious past when the government owned (and vigorously protected) the monopoly over telecommunications, railways, post, electricity, and various other infrastructures. He has likened his proposed new British Broadband company to the UK’s much-loved National Health Service — a national infrastructure providing health care free to the patient at the point of delivery (but a substantial and growing burden on the nation’s tax revenues). However, the realities of delivering if elected will likely prove to be more nightmare than romantic dream, going by the experience of Australia’s ill-fated original National Broadband Network (NBN) effort.
Lessons from Australia
It is difficult to argue with the sentiment of Jensen’s claims that the costs are likely to be much larger than initially estimated — though there will be much debate about their magnitude.
The NBN plan, which initially covered only the rollout of fiber infrastructure (not operating costs or the costs of providing the actual broadband services) and to 93 percent of the population rather than 100 percent, was initially estimated to cost 43 billion Australian dollars (£23 billion using current exchange rates). It represented the biggest infrastructure investment in Australia’s history but quickly blew out to over AU$70 billion (£37 billion) as it became clear that an arms-length government entity structured as a corporation struggled to meet either budgets or time frames when the disciplines of private ownership were traded for state control. Reflecting on the NBN, former Australian Prime Minister and Telecommunications Minister Malcolm Turnbull — who tried valiantly to reel in the budget and timelines when downscaling the initial proposal to a more modest mixed technology model — said that “setting up a government company for the national rollout was a big mistake” relative to New Zealand’s model of partnering with a private sector entity to provide a partly (not fully) subsidized network.
Furthermore, the Australian NBN project was hamstrung by the fact that the commercial environment in which the fiber network was deployed was neither a natural nor legislated monopoly comparable to that prevailing when the telephone network was in government ownership. Thirty years of telecommunications policies fostering competition, market liberalization, and privatization, combined with technological developments and other innovations have led to an industry in which effective competition is not just feasible but actual. While there may still be pockets where only one (or even no) fixed-line provider is economically viable, the reality is that infrastructure competition from rival cable and fiber operators is significant, at least in some market segments (e.g., residential cable and copper, fiber, or commercial fiber choices in urban locations). Yet the NBN was accompanied by regulatory provisions that effectively re-monopolized fixed-line markets by making it unviable for rival cable or fiber operators to compete with the government’s network (hence its business model of using urban profits to subsidize rural shortfalls).
Competition in technology and ownership matters
—
especially in a 5G world.
Government re-entry into the market is not a simple case of renationalizing one firm or even just one fixed-line provider. All competing telecommunications infrastructure providers are affected by any proposal to offer free services on government-owned fiber connections.
For starters, fixed-line providers that have entered the market in competition to BT face the stranding of their investments. While BT Openreach shareholders and the owners of rival fixed-line operators (e.g., Virgin) may be compensated for past investments (as were Telstra and Optus in the NBN plan, costing over a quarter of the original plan’s budget), this does not account for the severe dislocation and distortion to purchases and future investments in mobile and fixed wireless services effectively serving a substantial (and growing) number of consumers who prefer not to be tied to a cable. The number of wireless-only households in Australia is running substantially ahead of projections not just because of bad planning and abysmal service from NBN’s contracted cable layers but also from the growing number of households with different lifestyles and needs, for which a fixed-line connection is no longer optimal.
But perhaps most
important of all, the British Broadband plan is blind to the fact that
technological innovation — most notably the development and impending
deployment of 5G wireless networks capable of providing the level of
connectivity currently delivered to consumers on select high-speed connections — renders any attempt to
reinstitute a government-funded fixed-line monopoly service a massive risk to future
telecom industry development. Quite simply, across significant market segments,
mobile and fixed-line broadband access competes and increasingly capable 5G
networks will increase the competitive scope.
When consumers face the commercial price of two otherwise effectively substitutable or even partially complementary technologies, they can make an informed choice to buy one or the other, both, or neither. But when one is given away for free, purchase and use of the other — and therefore incentives to invest and deploy the network providing it — are inevitably and substantially depressed. This plays out in the substitution from a legacy to frontier technology over time and, static competition between two technologies. The effects of (inadvertently) subsidizing only a small proportion of fixed-line costs via the choices made in allocating financial risk in access-regulated legacy copper networks is almost certainly implicated in delays to fiber deployment. Fully subsidized fiber connections will almost certainly significantly disincentivize impending 5G mobile network rollouts by private sector operators — creating the near certainty that these too will have to be supplied by the government in the future if the UK is not to fall even further behind international comparators in deployment of this technology.
The past is a foreign country – there is no going back
It behooves UK politicians and voters to remember that there were good reasons why privatization and market liberalization were adopted in the first place. Those very policies were inhibiting the delivery of the sorts of services available in countries such as the US in the wake of the enlightened competition policies leading to the break up of the Bell monopolies. The US and Canada already exhibit substantial leads on the UK in mobile technology deployment. If Labour’s British Broadband plan is implemented as indicated, the gap between the UK and those countries will almost surely widen.
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