GUEST BLOG: National Broadband Plan – robbing Peter to pay Paul?

Business, Economy | Mon 29 Feb | Author – Business & Finance

Everyone in rural Ireland has either suffered from broadband difficulties or knows people close to them who have.

Venture into a local shop in rural Ireland and utter the word ‘broadband’ and you will probably be met with a chorus of dissatisfied commentary – tales of unreliable service and individual battles around acquiring this most magical of conduits for entertainment, education and business.

It’s been like this from the start. Eircom introduced their entry-level broadband service (i-Stream Solo 512K) back in 2001, with very limited urban availability.

So from the start, rural users have had to sit back and watch while their urban counterparts get to experience the best of online life, while they are denied it.

Why is it that rural users have been treated differently? It’s all down to return on investment (ROI). Remember that telecoms companies are there to function as successful businesses, providing ROI for their shareholders.

The cost of providing a broadband service to a rural user in a low-density area is a multiple of the cost to provide the same (or better) service to an urban user in an apartment block or three-bed semi. The provider needs to recoup their investment (and make a profit) out of their customer base. Otherwise, there is no point in making the service available.

Here’s a fun fact: just about any customer anywhere in Ireland could order 100Mbps fibre broadband service now. It would be delivered using a carrier Ethernet platform, over fibre optic cable. Get your order in now!

But you’d better have deep pockets though, because even in a location within 500-metre of a suitably equipped telephone exchange, you will be paying somewhere in the region of €1,000 to €5,000 for installation and maybe €10,000 to €20,000 per annum for the service. And that’s near an exchange. Bring it right out to the sticks and you’re looking at further costs for poles, cabling, road-opening licences, civil works, etc.

To bring this type of service to a rural mass-market is a huge task. Sure, economies of scale will bring down the above figures, but as you can see, the costs are significant.

URBAN ADVANTAGES

So the Government has conceived the National Broadband Plan, a major initiative designed to subsidise broadband in rural Ireland, providing super-fast broadband where commercial operators have not. There is a lot of talk of ‘market failure’ to bring super-fast broadband to rural users. This is not a market failure. This is the market responding and behaving exactly as it should.

Think about it this way: if a service is going to cost (for example) €2,000 per annum per customer to provide, but consumers are only willing to pay €540 per annum for the service, then the market works – the service is not provided. There is no market failure here.

But the position could be taken that broadband service at a given price-point is a right or entitlement. In this scenario, if it costs more to provide service to a rural user than the user is willing to pay, then what are the options?

Basically, someone other than the receiving consumer has to pay to subsidise delivery to the receiving consumer. This can be achieved by one of the following means:

  • Direct exchequer subsidy. This means that urban broadband customers’ taxes (income tax, USC, VAT) are used to allow rural broadband users pay for a service at some arbitrary below-cost price. So the city-dweller pays for the rural users’ broadband at the petrol pumps, for example.
  • ‘Postalised’ broadband charges. This refers to the historical situation where a decision was made that the same price should be paid to post a letter to a rural address as an urban address, even though the cost of the rural delivery was a multiple of the cost of the urban delivery. Therefore, the price in urban areas was increased and the price in rural areas decreased, in order to make a standard stamp price, where urban postage was priced highly to subsidise rural postage. In this type of subsidy, the urban dweller would be subsidising the rural dweller, not through taxation, but through increased broadband bills, perhaps through a Public Service Obligation levy, as with electricity.

INTERVENTION

The bottom line is that to provide universal broadband, urban dwellers absolutely will be subsidising rural dwellers in some shape or form. This is unavoidable.

There is absolutely no doubt that access to good broadband at an affordable price is desirable for society as a whole, but it needs to be paid for somewhere along the line.

To what extent, then, should a rural service be subsidised by other broadband customers? Should the beneficiaries of the subsidy expect a 1-gigabit fibre connection when their subsidisers might be on a 30Mbps VDSL line? It just so happens that the answer to this might be yes, as deploying the 1-gigabit fibre line in a green-field environment would actually be cheaper than a 30Mbps VDSL line. That might not make it any easier to swallow for the subsidiser though.

The cost of providing a broadband service to a rural user in a low-density area is a multiple of the cost to provide the same (or better) service to an urban user in an apartment block or three-bed semi

Following the initial announcement of the 700,000-premise ‘intervention area’ (the area covered by the scheme, to boldly go where no operator would go), eir announced that they would commercially provide fibre broadband to 300,000 of these premises.

This is being validated by the Department of Communications, Energy and Natural Resources (DCENR) at the moment and if accepted, will mean that the intervention area will have been reduced to 400,000 premises.

This will completely change the economics of the plan and may cause delays or a rethink. There are acute problems with the plan not having a proper cost-benefit analysis in place in accordance with domestic public expenditure rules and there also may be issues with EU state-aid rules.

Add this to the difficulties in even defining the intervention area and you can see that whichever way you look at the National Broadband Plan, it is ambitious and aspirational but deeply flawed.

The last thing the country wants is another Irish Water-type fiasco. If the plan does come to pass, it will transform broadband services in rural Ireland by providing a state-of-the-art wholesale access network, allowing rural consumers to buy services at below-cost from various different retail operators.

However, The Subsidised (the occupiers of the 300,000 premises in the intervention area) will have a substantial part of their monthly bills paid for by The Subsidisers (the occupiers of the other 2 million premises in the state). Is this fair? And at the end of the day, who wants to take sides? Shouldn’t there be broadband for all, no matter the cost?

Photo (above): James Stewart

About the blogger

NovaDave McDonald is founder and MD of Nova Broadband (a regional ISP based in Cork).

He began his career in IT in Australia as a helpdesk manager and later, a web developer and after four years returned to Ireland. He worked for two years in software development, working for companies such as Schering Plough, Bord Gais and Marathon Oil, developing line-of-business applications that were used internationally.

In 2004 Dave started Nova Broadband, having identified a gap in the marketplace for an alternative ISP. In just over 10 years, Dave has built Nova up from scratch, developing a custom software and hardware ISP platform.

Dave has been responsible for design and operation of an independent high-speed broadband network covering thousands of square kilometres, providing critical internet services to business and residential customers.

He has achieved an Enterprise Ireland/IMERC Innovator of the Year award for his work with SeaFi Marine Data Communication, which included design and rollout of a marine data wireless network for Port of Cork.