What’s New

2nd February 2010

With broadband speeds in the UK slower than some of our competitors, Simon Hooton asks if there is a case for public sector intervention to develop new networks - or if it should be left to market forces.

The march of the Internet will surely stand out as the defining cultural, economic and social shift of the noughties.

Although the digital revolution was underway well before 2000, since then it has penetrated every aspect of our lives and the availability of broadband has been instrumental in making it happen. Broadband adoption in the UK has now grown to more than 13 million homes - half of all households have access to the internet from home and the UK leads the world in broadband availability, with 99.6 per cent of homes within reach of an exchange.

Undoubtedly, broadband has generated significant benefits. One study found that productivity improvements of five per cent can be achieved by manufacturing firms, 10 per cent by the service sector and 20 per cent within knowledge intensive businesses [1]. Another report found households save £560 per year on average by shopping and paying bills online [2].

But despite its widespread availability, broadband speeds in the UK are slower than in some other countries, as can clearly be seen from the chart below.

The current technology - asymmetric digital subscriber line or ADSL - has slower upload speeds than it download speeds, and the more users sharing the line, or the further away from the exchange, the slower it becomes.

Digital Britain shows the Government has not lost sight of the need for next generation broadband. Although the pace and impact of the 50p per month fixed-line phone levy to accelerate roll-out can no doubt be debated.

But is there a good case for public intervention? How fast and far would the roll-out happen without some sort of stimulus? And what additional benefits would higher speeds bring to the UK? The answers at this stage are far from clear cut.

On the one hand, it may well be that take-up of next-generation, faster broadband will be slower than that of ADSL and the benefits less significant [3]. BT is taking a cautious approach to the roll-out and Virgin says it has no plans to extend its current network.

Looking at the current applications for high-speed broadband, there are clearly diminishing levels of value and demand currently visible.

On the other hand, we should not forget that commentators were equally cautious about first generation broadband. Few expected the network to be rolled out as fast as it has been and the benefits were underestimated.

From an economic development perspective, the temptation to accelerate the roll-out is huge. There is the potential to achieve competitive growth and attract inward investment, to improve productivity, deliver health and education services more efficiently, and bridge the digital divide(s).

There can be no doubt that that the market will eventually provide the infrastructure necessary to support these faster connection speeds. This means that public sector interventions require tough decisions about how to maximise returns, limit costs and avoid crowding out commercial operators. There are four broad options for public sector bodies.

The first of these is full-scale intervention. This is being pursued in South Yorkshire through Digital Region, which will see a fibre network rolled out to every street with internet service providers making the final connection to homes and businesses. Regeneris Consulting has been appointed to evaluate this initiative over the coming years and will be developing answers to these complex questions.

Secondly, other areas may choose to simply fill the gaps by connecting up areas over-looked by the market. A third option is to encourage key users such as large public sector agencies to establish their own networks and sell spare bandwidth to others. Finally, a lighter-touch intervention would be to stimulate demand by households and businesses in the expectation that service providers will respond.

Conventional wisdom and past experience suggest less invasive, lower cost interventions are preferable. They would be in line with market sentiment, reduce risks and minimise disincentives to competition among suppliers. Nevertheless, the more ambitious build it yourself option has its attractions as it offers scope to dictate the pace of development and secure what could be substantial revenue streams.

Several public sector bodies are understandably tending to favour this more ambitious approach. Our view is that if public sector bodies are intent on building their own network there are two essential elements that they need to address, in order to maximise the effectiveness and added value of the intervention. Firstly, they need to build the network soon and to do it quickly. Past experience shows that the window to generate impacts ahead of the market is not great. Although there may be some lasting advantages to being first in the market, the bulk of benefits will still need to be secured in the early days. Secondly, in order to secure a positive return from any new infrastructure, the public sector will almost certainly need to invest additional resources to stimulate adoption and exploitation.

Action on both network build and exploitation needs to be swift, ambitious and concerted. If not, the substantial up-front costs of intervening may never exceed the inevitable benefits of sitting back and waiting for the market to proceed.

As part of Regeneris Consulting’s evaluation of Digital Region, we have developed an impact model to estimate the scale and range of economic impacts which NGA infrastructure might generate. Please get in touch with Simon Hooton (s.hooton@regeneris.co.uk) if you would like to learn more.

[1]. Micus Management Consulting GmbH (2008). ‘The Impact of Broadband on Productivity and Growth’. On Behalf of the European Commission DG Information Society and Media.

[2]. SQW (2008). ‘Broadband in the Home: An analysis of the Financial Costs and Benefits’. Final Report to the Post Office.

[3]. A recent study of fibre in NZ found no discernable impacts – Grimes, A., Ren, C., Stevens, P. (2009). ‘The Need for Speed: Impacts of Internet Connectivity on Firm Productivity’. Motu Economic and Public Policy Research. University of Waikato. NZ Ministry of Economic Development