Governments must support the deployment of nationwide broadband networks to overcome private sector hurdles

London, 12 August 2009: Private investment in next-generation broadband networks will lag until there is greater certainty over revenue, regulation, and technology from government policymakers, according to a new report from the strategy consultants Booz & Company. Digital Highways: The Role of Government in 21st Century Broadband Infrastructure is an extensive analysis of governments and telecom operators in 20 OECD countries.

World leaders who have committed to build¬ing next-generation national broadband networks (NGNBNs) compare them to other infrastructure—such as roads and airports, as well as copper networks that were rolled out at the turn of the previous century—in terms of their importance to economic growth. Nations that don’t make this commitment risk get¬ting dominated by those that do, as countries that communicate and share information boost their economy and future prosperity. “The job of building the next generation of broadband networks is too important to be left at the mercy of investors’ willingness to enter an uncertain market,” said Michael Peterson, Communication, Media, and Technology partner at Booz & Company.

The governments of New Zealand, Australia, Singapore, Portugal and Greece are among the countries that have made significant commitment to NGNBNs in the past year or so. Booz & Company analysis shows that 10% higher broadband penetra¬tion in a specific year correlates to 1.5% greater labour productivity growth over the following five years. Countries in the top tier of broad¬band penetration have also exhibited 2% higher GDP growth than countries in the bottom tier of broad¬band penetration.

Broadband has transformed the ways in which busi¬nesses, consumers, and governments function. But customers are now seeking much more from broadband services, such as virtual worlds and communities, or productivity-enhancing applications such as cloud comput¬ing and telepresence. Such applications require more capacity and capability than first-generation broadband can offer. Next-generation networks would enable access speeds up to 30 times higher than current networks, but would cost 10 times as much per subscriber to deploy.

The cost of deploying a NGNBN in major markets may be up to 10 times the EBITDA of an operator’s national business. Although operators may still be considering tactical urban deployments of next-generation networks, they are reluctant to consider nationwide roll-outs, particularly in light of the current economic crisis. Furthermore, even if the economy and credit market were settled, the technology isn’t - competing wire-line technologies have investors reluctant to place significant bets on just one.

Operators’ reluctance to spend on a new network stems from the fact that they will pay to build it, while competitors who don’t have to make that investment can capitalise on it. Telecom operators face competition from players in adjacent industries, including cable, and from application providers like Skype. Increased competition and new business models are fragmenting revenue streams, reducing the amount that network operators can capture. “This disrupts the traditional revenue model of telecom, whereby an operator would invest significantly to build the infrastructure and draw value from its networks over a period of 15 years or more,” said Michael Peterson.

Whether NGNBNs can gener¬ate returns depends on the governing regulatory regime. However, in most countries, these are still being defined. Government regula¬tory tools for first-generation broadband, including local loop unbundling and interconnect regimes, may not apply to NGNBNs.

To date, government response to the market’s need for NGNBNs has taken three distinct forms. Some policymak¬ers have chosen to drive the process actively (e.g. Japan and South Korea), some have chosen to facili¬tate private-market solutions (e.g. Sweden and Norway), and some have chosen to step back and observe market challenges and jump in only when absolutely required (e.g. most of Western Europe and North America). If the goal is to deploy NGNBNs as quickly as possible, driving the pro¬cess is the best option - nations with “driver” policies have much higher penetra¬tion rates.

Governments have three levers beyond traditional regulation for building out NGNBNs:

1. Set the regulatory agenda to encourage new business models. Traditionally, telecom has been a vertically integrated sector, with operators owning and operating all elements of the network while serving end users. This vertical integration is inhibiting investments in NGNBNs, with operators wary of incurring deployment costs and then being required to share the infrastructure. Regulators can encourage the establishment of a multi-layer environment (with separation of passive infrastructure, active components, and service provider activities) to attract a new set of investors to the industry.

2. Invest in network infrastructure. Direct government investment in NGNBN infrastructure reduces the magnitude of invest¬ment required from the private sector and accelerates NGNBN deploy¬ments. Government investment comes with inherent risks, including the potential to dissuade private sector investments. A robust risk/benefit analysis is imperative. In making their investment, policymakers have to consider three distinct options: direct ownership, public–private part¬nerships (PPPs), or concessions.

3. Stimulate demand. For many countries, NGNBNs are seen as the enabler for future economic growth and prosperity. As such, governments have a role in encouraging use of such infrastructure to provide assurance to investors, as well as increasing economic benefits across the economy. We can already see examples emerging; for instance, Japan subsidises access to broadband for certain users (e.g. schools) and mandates that all administrative agencies must buy services from the NGNBN.

There are three key elements that governments need to consider if they want to deploy an NGNBN. It is vital they get a strong grounding in the needs of their markets, the likelihood of private market success on its own, and what the market requires from the public sector -whether regulatory definition, funding, or some other critical action. Second, they have to be willing to engage in dialogue with stakeholders to address their concerns and ensure their cooperation. Finally, they must set clear goals for themselves on the kind of reach they are hoping to achieve, and at what levels of affordability - and then design the policy.

“Next-generation broadband should be part of an economic strategy, rather than a concern for sector regulators. For mature economies, the twin imperatives are speed and access, and next-generation broadband has the potential to offer both at levels never before imagined,” said Michael Peterson. “Countries taking the first step towards next-generation broadband will be better off than those that remain on the sidelines.”