Laying cables in countryside

Broadband in an age of austerity

Investment in rural broadband access has been protected by the government, to encourage ISPs to promote growth in areas that desperately need it.

Amid the cuts announced by the UK's coalition government, one chunk of money has been protected: the fund to help extend broadband services to rural communities and other so-called 'not spots'. The government has kept the promise it made last year to put £530m into encouraging Internet service providers (ISPs) to bring broadband to areas that MPs say are desperate for faster access.

'In our surgeries, in our postbags, many of you are hugely frustrated [with slow Internet access] whether it's in your business and not being able to develop in new markets or in your communities in terms of getting access to services,' said Julian Smith, MP for Skipton and Ripon, launching a conference in February on rural broadband in the region. He claimed every MP in the area backed a local campaign for improved Internet access. 'For our rural economy, where technology can transform lives, this would make a tangible difference to our future.'

The North Yorkshire campaign won £10m in funding for pilots and is pushing for more to speed up development. Although the grant sounds substantial, the money has to be eked out until the middle of the decade and is small compared to the cost of building an effective rural broadband network.

'You need large amounts of investment for low-density areas. I don't think that has been addressed in a rational way yet,' says Tim Johnson, chief analyst at Point Topic. 'UK broadband is hardly a lucrative business to be in, in the first place. They don't really have the money for the next step.'

The rural build-out is never expected to be a moneyspinner, but it is important to the next phase of broadband development because it will be based more heavily on the same high-speed fibre-based links as used in denser areas. There is little point in trying to deliver more DSL lines to widely dispersed houses that are too far from an exchange to provide a significant speed upgrade over dial-up.

Who will foot the bill?

Even at this early stage, the UK's policy of deploying next-generation broadband to rural areas is under threat because of an argument over how the costs will be shared by ISPs. It is not just the rural roll-out that will be expensive: increasing the number of fibre connections for fast broadband in densely populated areas will demand a greater civil-engineering investment than the DSL roll-out.

In his 2008 report to the then Labour government, Francesco Caio, formerly head of Cable & Wireless and now vice chairman of investment bank Nomura, argued that the government should relax planning laws to allow more fibre to run above ground and through existing tunnels such as sewers. At the time, planning laws meant companies could only use existing poles for additional cables.

An Ofcom ruling in October 2010 made it possible for ISPs to buy access to BT's network of telephone poles. Virgin Media said this could enable it to expand its fibre network from 12 million to 16 million UK homes. By April, the situation had descended into rancour as ISPs complained that BT's proposed pole-access prices were too high.

The ISPs threatened to boycott the government's rural-access project before it got off the ground, claiming that the current situation handed BT a pricing advantage. Virgin, Geo, Talk Talk, Vtesse and others argued it would be cheaper to build their own poles and ducts. BT countered by saying its duct-access prices matched those used by European counterparts and that its plans for pole access 'had been held up' by companies delaying their involvement in trials.

Johnson at Point Topic argues that, once the infighting is over, BT is likely to end up implementing the lion's share of the network build-out because of its greater resources.

Playing catch-up

So how far behind is the UK in Internet access? Well, it depends on how you look at it.

The Organisation for Economic Co-operation and Development (OECD) claimed in its July 2010 recommendations to the new UK government: 'The UK telecommunications market is among the most competitive in the OECD and prices are relatively low as a result Broadband penetration in the UK is 29 subscribers per 100 inhabitants, higher than the OECD average, and the UK also leads the OECD in broadband affordability.'

It was not all good news, though: 'While broadband prices in the UK are low, the advertised speeds lag those in many other OECD countries.'

The UK leads the US in broadband penetration but lags in terms of fibre access. The proportion of subscribers with fibre-based access is tiny, although BT is increasing the number of exchanges that support it. However, the Nordic countries have managed to convince operators to provide far more extensive fibre deployment. By 2009, 25 per cent of Swedish subscribers were accessing the Internet over fibre.

The OECD said: 'BT is lagging in upgrading its network, which leads to the question of whether there is sufficient incentive for BT now to upgrade its network to fibre.'

In his 2008 report, Caio argued: 'There is no need for major government intervention in the short term to accommodate traffic growth, but in the next five to ten years [Next Generation Access] will become a critical infrastructure and the government should actively support and monitor its development.'

Uptake is all

Despite relatively poor headline figures, the UK is in a surprisingly good position when it comes to reaping the benefits of broadband.

'We were badly behind in the first years of the 21st century, then BT got its act together and we rushed ahead, overtaking France,' says Johnson. 'For a while, there was no country bigger than the UK that had higher broadband take-up. And all the evidence is that when it comes to using broadband, Britain makes more use of it.

'You can get 100Mbit/s in Japan. The country was supposed to be the leader. But it has lower broadband take-up.'

Despite Japan having the lowest broadband prices and high availability of fast, fibre-based broadband, the OECD's figures show it is outside the top ten countries in terms of wired broadband penetration. However, Japan is in the top three countries for mobile broadband penetration, narrowly trailing Sweden at more than 75 subscriptions per 100 inhabitants.

Korea achieved an early lead in fast broadband deployment through enthusiastic government stimulus. The government paid for backbone networks and provided subsidised loans to telecom operators to aid the development of local access networks. In 1995-2005, public investments totalled $900m, triggering $32.6bn in private investment.

Yet Korea was overtaken in terms of service uptake in the mid-2000s by the Netherlands and Denmark. Worse, the emphasis on broadband investment has done little for Korea's economic competitiveness.

Economic benefits

Economists have long argued for the transformative effects of broadband. The OECD claimed in 2002 that one-third of the increase in productivity in Germany, France and the UK from 2001 to 2011 would be due to the introduction of broadband.

Economists are fairly consistent about the level of broadband investment needed to create a job in the west, despite the difficulty of attributing employment growth to a specific change. A 2003 study by Robert Crandall of the Brookings Institute and Hal Singer of Navigant Economic claimed an investment of $55,000 in broadband infrastructure creates an additional job. A follow-up analysis in 2009 found that both broadband investment and job creation were higher than had been expected in 2003, but that the cost of creating a 'broadband job' had risen to around $65,000.

Raul Katz of Columbia Business School and colleagues estimated that Germany's broadband strategy to 2014 would yield 304,000 jobs for an investment of £20.2bn: roughly £66,000 per worker. Germany's broadband market has developed like that of the UK, with very low fibre penetration, but the country has now committed to creating a faster network.

Germany's 2020 Ultra Broadband plan is estimated to cost around £15.7bn and, according to Katz, will deliver a further 237,000 jobs. Many of the jobs would be in construction but Katz calculated the cost per job created would be similar to that for the initial broadband build-out.

The economic benefits of broadband are not universal: the fruits of increased broadband depend on the underlying economy. A 2009 report by LECG found that countries with relatively low levels of ICT usage did not see extra growth from adding broadband subscribers. The same report defined a Connectivity Scorecard, which relates broadband penetration to economic growth. It shows that South Korea, despite having impressive consumer-oriented broadband delivery, did not make the most of the build-out because many of its businesses, didn't make much use of Internet access. Korea's position improved by 2010 but business use still lags.

The UK's economy is structured such that it could see a good pay-off from additional broadband investment. The question remains whether the government and Ofcom, both wary of unintentionally distorting the market, can move the right policy levers to encourage ISPs to spend the money and put the fibre in place to bring some sort of broadband to the country's not-spots – and move the urban rump beyond DSL. *

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