NBN benefits

The SMAge led a report yesterday with;

THE federal government has been accused of misusing research to build the case for the National Broadband Network in an international study that finds the claimed benefits ''grossly overstated''.

Released in London ahead of today's vote in Canberra on legislation to support the NBN, the study finds evidence to support the claims made for fibre-to-the-home ''surprising weak'' and cites Australia as a key example.

The first three-quarters of this would have you believe the study was focussed on the NBN in Australia, it is only when you get to the end that you realise that the article was really about the case for investment in broadband networks in general.

We are told that the report was "prepared by British telecommunications consultant Robert Kenny with Charles Kenny from the US Centre for Global Development."

In his blog John Quiggin tells us that;

Five minutes with Google is enough to determine that

* the Centre for Global Development is a genuine and reputable thinktank, with no particular axe to grind

* Charles Kenny is not what you might call an Internet enthusiast, having written, in 2002, a piece entitled Should we Try to Bridge the Global Digital Divide.

What he didn't realise is that the report isn't a report of the Centre for Global Development, but merely a working paper published on Kenny's blog.

I haven't had time to review the paper in detail - and probably don't even have the inclination to do so. It makes the usual and expected criticisms, that proponents of benefits always choose the best number available to quote (this is the accusation against Rudd), that the benefits of the broadband can't be separated from the benefits of the applications, that the correlation between growth and broadband deployment isn't as would be expected.

All these points are reasons why the decision on an FTTP network can't be made purely on the basis of a calculating machine. No amount of cost benefit analysis is a substitute for judgement.

It is interesting that the paper's principle critique is over the idea of "subsidising" broadband. Ultimately the Government plan is not to subsidise broadband over the long term, it is simply to bring forward the investment using the power of Government. The business plan forecasts the Government's investment will be fully repaid by 2034 (as indeed was all the Government's investment in Telstra prior to any privatisation).

In talking of Government and investments in faster the authors note

But faster technologies don't always triumph; think of passenger hovercraft, maglev trains, and supersonic airliners. Concorde (if it hadn't retired) would still be the fastest passenger aircraft today, having first flown in 1969. It turned out that the incremental benefits of speed to most customers were not worth the extra cost.

But on ABC Radio one of the authors participated in the following exchange;

ALEXANDRA KIRK: Mr Kenny accepts governments can justify spending billions on big infrastructure projects.

ROBERT KENNY: State highways in the US would be an example and we're not against that in principle. We are just saying that if you are going to spend that kind of money you need to have a clear idea of exactly what benefits you are hoping to get when you spend it.

The use of the US Highway network is an interesting one, because that was never an economic project. It was indeed a defence project designed to facilitate the movement of assets in the depths of the Cold War. In particular nuclear missiles needed to be able to be quickly and efficiently moved to avoid ease of targeting.

However, as is detailed in the history of the cargo container The Box the presence of the highways meant the migration of the container, designed for ships, to road transport was an unexpected side benefit.

AS I outlined in my two items on CBA for itNews the problem with a CBA is that the benefits can't be accurately measured, but the utility of the studies is that they help understand how decisions about the network might affect the benefits.

The real difficulty is that the suite of technologies of which broadband is a part are general purpose technologies - like the internal combustion engine - and effect everything we do. They also have high network effects, the benefit grows geometrically* as the number of users grows.

The point of being a GPT is that the benefits and effects are widespread and individually potentially small but in aggregate large. In common with the internal combustion engine you can't also separate the benefits of the broadband from the benefits of the applications, just as you can't separate the benefits of the petrol from those of the engine, or the benefits of the left shoe from the right shoe.

The only distressing thing over the Kennys' paper is the way it has been reported as if it actually proved anything.

Mighty strange was the reliance placed on it by Sophie Mirabella in an item titled The NBN still hasn’t brought the promised sunshine which tries to make a case about the lack of transparency on benefits and uses the Kennys' paper to suggest there aren't benefits.

But scrutiny of the legislation passed this week, and the amendments to it, is interesting. A few years ago the parliamentary draftsman started drafting laws that made Government publishing information in electronic form admissable. In the Bill we see that the Minister is now obliged to publish certain things on the Department website, often formally requiring a fourteen day consultation period.

One of the benefits of ubiquitous, always on, and speed unconstrained internet access is in the Bill itself.





* The reality is that the supposed law on networks - Metcalfe's Law - is wrong. The value doesn't grow as n squared. More likely is the Odlyzko version that it grows at n*log(n).







Novae Meridianae Demetae Dexter delenda est

The TIO

I wrote an itNews opinion piece on the TIO recently.

Many thanks to Holly Raiche for filling in the blanks for me on at least part of the process by which the TIO came to be. The recommendation for a Telecommnications Ombudsman followed a House of Reps inquiry into Telecom's handling of complaints.

The committee drew heavily n a Communications Law Centre report Handling of Telecommunications Complaints which is in five libraries but I haven't seen yet.

The committee actually recommended an ombudsman located within AUSTEL. Stuhmcke writing in 1998 foreshadowed much of the ongoing discussion about the scheme.




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NBN Co Business Plan

Why is the NBN Co Business Plan summary on the ALP website rather than on the DBCDE one?

Doesn't tell one much, except a reminder this is an investment. Forecast the $27B will be repaid by 2034.


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Measuring the Education and Health (non) crisis

OK I live in NSW. One thing if you live in NSW is that you are assumed to believe that we have to get rid of the NSW Government. The motivation is because we supposedly have crises in all areas of service delivery.

I've actually been defending the NSW Government recently. Our health system actually works well, we have a healthy long living population and we do this relatively cheaply. The few cases that get great media coverage aren't actually cases of a failing health system. Sometimes they are poor individual judgements, and sometimes they are just unrealistic expectations.

Our schools are similar. In fact, on national curricula the issue is about bringing everyone else up to the standard of NSW.

But referring to crises in health and education isn't just a NSW thing. Bernard Keane writing in Crikey today recounts the same tales coming from Victoria and nationally.

But he goes further and provides measures. Our health and education outcomes are near the top of the OECD, but we do it all by spending below the OECD average.

That means these systems are both effective and efficient - the holy grail of management.

Thankfully the Australian cricket team looks like it is about to give us something to really worry about!

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Malcolm in fantasy land

Two SMH articles say the Government is refusing to release the NBN "business case".

From yesterday's Hansard the Member for Wentworth told the House;

If this project were being undertaken by the private
sector—a public company, for example—the management,
or the board would have to present a detailed
business case to their shareholders. They would have to
persuade their shareholders that the project was going
to add value to their shareholdings, that it was going to
increase dividends and that it was going to be a wise
investment of the shareholders’ funds. They would be
accountable to the analyst community. There would be
conference calls, meetings and presentations

Actually wrong. Companies never present their business cases for individual projects to shareholders. They present the overall financial case, and that is the Commonwealth budget.

It also looks like Malcolm is the source of the confusion between what has been delivered (a business plan) and what they want released (a business case). They are different.

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Troubles at the TIO

I noted in a recent opinion piece on the TIO that there is disquiet with the scheme from both industry and consumers.

In particular I noted concern that the scheme had been registering complaints from customers who had not previously sought to resolve the matter with the provider.

News today that one provider is suing the TIO in the Federal Court on this and other matters. The article suggests there are 260 complaints covered in the case but only details;

Exetel disputes about 30 first-level complaints ''where the [TIO] ought not to have recorded a complaint because no complaint had been previously made to the applicant'', and 86 complaints where it was not given the full 28 days to respond. A further seven were allegedly related to the customer's own equipment and four were not related to Exetel's services. (by my count 127 - but this may be the issue not complaint count).

The interesting thing about the action is that the entity being sued is not the Ombudsman as in the person, but the TIO scheme itself. The Board is the entity that has to respond to these charges - yet the Board composition suggests that the Board must be aware of the concerns that have been expressed by service providers.

I need to go get a copy of the statement of claim to understand this better. I don't follow the reference in the article that "Exetel claims the TIO breached its obligations under the Telecommunications Act and its duty of care to Exetel as a member of its dispute resolution service." The case is actually listed in the Fedreal Court as being about misleading and deceptive conduct (i.e. s52 of the TPA).

There is a touch more information in an earlier report in CIO magazine. This was written at the time when the claim had been given to the TIO prior to filing. It asserts that the TIO has been in dispute with the member for nine months.










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Inconsistency of the Senate

Reports today that the Senate has passed a motion calling for the immediate release of the NBN Co Business Plan while the Prime Minister has noted that the Government at least needs to decide if there is information that shouldn't be released. More on the last point later.

It is the basis of the argument I dispute. The coalition would NEVER support a motion that any business was required to publish its whole business plan, even though that plan spends "shareholder money". The way we "protect" shareholder interests is requiring the management to provide the plan to the Board as representatives of shareholders.

This raises the ultimate question, is the Parliament the representative of the people or is the Government the representative? The short and practical answer is actually that it is the Government. The annual budget and estimates process is only conducted at the level of high level measures, there is no detailed scrutiny.

The current motion also includes a confusion of whether what has been delivered is a business plan or a business case. The former is a document that covers all the activities of a company for a defined period. Usually the period is three years but it may be five.

A business case is a study of the whole returns of a specific (investment) proposal. That would be about the commercial return over the whole project (which is still different to a cost-benefit analysis).

That raises the important question of why the first business plan is particularly of interest. Surely the issue should be about what the level of disclosure should be on all future business plan submissions. As I've written elsewhere this is an issue for the NBN Co legislation.

The only potentially valid criticism of the Government is that the NBN Co legislation hasn't yet been introduced. However, the Minister and Government have the perfect defence in the obstructionism thus far deployed by the Parliament, including the entirely pointless NBN select committee.

If Senator Ludlum wants to make his name as a champion for open and transparent government he needs to learn to do it by addressing substantive change to legislation and not engaging in the kind of stunts that we have seen pulled so far.






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The Public Interest

I had reason to be reviewing some radiocommunications issues this week. The Radcomms Act uses a very vague criterion of the "public interest" at some points.

In the history of radiocomms policy a standout article by Any Rand makes a case for the "property status of the airwaves". In it she directs her invective at this very concept.

"The public interest" -that intellectual knife of collectivism's sacrificial guillotine...

It is a great line - highly effective as rhetoric but ultimately entirely vacuous. After all the "anti-collectivist" position as intellectually advanced is that the public interest is a valid concept, but is best served by everyone acting in their own interest.

Which brings me to my CPRF paper delivered yesterday in which I conclude that there is no evidence that the decline in prices in telecommunications services over the last thirteen years has anything to do with the introduction of competition.

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Asset valuation

Standard economic theory says that in a competitive market the quantity produced and consumed will be that which sets prices equal to marginal cost. The definition of "cost" here includes the need to provide a return of and to capital employed. The return to capital employed is what accountants would call profit (but not economists).

There are three interesting cases of how asset valuation problems make this theory unworkable.

The first is the problem of assessing something like the asset value of Telstra's network for determining regulated access prices. The difficulty is all in determining what is the appropriate allowance for return of capital. Technically this is achieved by recognising depreciation as a cost - but the challenge is how to work out the depreciation. Once again the economists have a different approach to the traditional accounting mathematical discounting measures. The economic depreciation looks at how much the asset will be used in different time periods - so if it is a new network whose use grows the depreciation is backended while depreciation formulae would usually allow more depreciation upfront.

But the issue becomes far harder if there is a change in ownership of the asset. The Telstra example is that there are some who would argue Telstra's network has mostly been depreciated (the capital has been returned) and so access prices should be set at that new asset value. However, the asset was sold (in three stages) to new owners who didn't pay the depreciated value of the asset but instead valued the asset on the basis of expected future cash flows. (In the economics biz this is called "capitalizing monopoly rents" and was always the problem of privatisation).

The second example comes from banks and interest rate margins. The Australian banks earn their income on the spread between rates they lend and borrow money at, less the cost of operations plus fees. Their problem is not the return of capital but the return to capital. Their shares are traded on the open market and have been increasing in traded value based upon expectations of future dividend streams. But the higher share value increases artificially the "asset base" that the banks need to get a return on. (The solution is to increase the share of not-for-profit banks and get people to stop expecting bank share prices to increase).

The final example is derivatives. The big debate with financial product asset valuation is whether they should be "marked to market" or not. Marking to market avoids firms artificially inflating an asset value but equally it leads to systemic risk if there is asset price inflation.

Ultimately one failure of standard theory is to ascribe to assets only their value in use whereas in real markets potential purchasers consider assets to have potential value in use and potential value from future resale. Bubbles are simply those cases where the rational purchaser ascribes more value to the future resale than to the value of use.

The biggest divergence between orthodox and heterodox economists is the belief of the former that "the market" is not just a platonic ideal but an actual timeless reality, whereas the heterodox believe that all markets are socially constructed.

It is some benefit to the heterodox that asset values, not just markets, are also socially constructed.

Memo to Joe and Wayne

To Joe and Wayne and anyone else who wants to bob up in the debate on banks, you continue to misrepresent competition.

The suggestion is that somehow or other a lack of competition means that customers can't shop around for better rates. But the economic theory on which competition policy relies asserts that in a competitive market producers have to price to market. That is, in a perfectly competitive market all producers set the same price.

This creates a conundrum for competition regulators that they can't distinguish between the effect of collusion (the same price) and the effect of competition (the same price).

Equally the rejection of "signalling" (a conduct that I've often thought does amount to tacit collusion) can equally be defended as the assumption of free market theory is that all producers and all suppliers are fully informed before they make decisions.

The solution isn't mindless repetition of the word competition - it is to understand the dynamics of the market - and the related problem of asset valuation (see next post).

The NBN - the best post

My apologies to Crikey for reposting one of today's comments here, but it is simply too good to not redistribute. It is a really good explanation of how even "trivial" aspects of the NBN are actually very important.


Gabriel McGrath writes: Re. Keith Thomas (Monday, comments) who wrote: "we have an official estimate, please, of the extent to which the NBN -- if implemented as planned -- will be used by gamers?"

Hear hear, Keith!

It’s about time we swung NBN debate around to the needs of decent, mainstream Australians.
Like Marion Lancaster, a resident of Bribie Island Retirement Village, in North Queensland. She’s one of many retirees there who aren’t as mobile as they used to be, but still need some physical -- and social -- activity. Each week, they play Wii bowling. They’ve found it to be a fantastic social event, and as their physiotherapist Vera Fullerton notes, it improves their fine motor skills.

What could an NBN -- with high speed internet to metro, rural and regional Australia do for them? It could mean elderly residents in Bribie Island playing games against new friends, in Perth or Launceston. They could start and end each game with full-screen videochat, so we have both physical and social stimulation for our growing aging population, overcoming their inability to do stronger physical activities – and the tyranny of distance.

Of course, it’s not just retirees who comprise Australia’s decent mainstream gamers. With 88% of Australian homes having one or more gaming devices, it’s your next-door neighbour, the bank manager and the woman who drives the 514 bus each morning.

Finally Keith, you mentioned the NBN’s ability to improve health & education. You’ll be glad to hear of the fantastic potential of games, and an NBN, to do even more, to improve the lives of decent mainstream Australians across the country. People like the design students from Swinburne’s Faculty of Design, who just won the 2010 Premier’s Recognition Award. Their series of website games help autistic children learn life skills, like coping with change, recognising emotions and non-verbal communication.

Can you imagine, how good it will be when families with Autistic kids -- in the most remote regions of Australia -- can access that? And then there’s the children’s burns units in hospitals, that use a game called SnowWorld, that’s been found to be a very effective anaesthesia for pain management. Wouldn’t it be great for even more interactive games and further studies into their benefits, that are more easily achieved with widespread highspeed internet?

PS: Keith, teachers in Mosman and doctors in South Melbourne may be fine, but I’m not sure their counterparts in rural areas have "sufficient high-speed connections for their purposes". Well, they would tell you so in an email, but the broadband’s really slow at this time of day in the back of Bourke, when more than a few people try to use it.






Novae Meridianae Demetae Dexter delenda est

Must be news to the ACMA

Writing in the SMH today, to explain the Packer move on TEN Elizabeth Knight said;

Since then there has been renewed interest in free-to-air networks thanks to the allocation of new digital spectrum that has allowed Ten, and its rivals Nine and Seven, to start second- and third-string channels.

Most of these new channels have yet to register much of a financial return. However, there is an expectation that over the next few years the free-to-air networks will be allocated even more spectrum and the number of channels could double.

Given that the ACMA held a seminar this week on the Digital Dividend - which is the recovery of 126 MHz of broadcasting spectrum - I bet they are surprised to hear that more will be allocated.

What Knight is getting confused by is multi-channeling in the digital spectrum already allocated and the fact that the networks are learning how to get more data throughput out of it. Hence more channels, but in the medium term less spectrum.


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The Measles and the Telephone

I'm pleased with my opinion piece for itNews on the ACMA's review of numbering. An interesting part for me in this is experiencing sub-editing from the writer's view.

Today's piece includes the paragraph;

In some ways it's a return to the earliest methods of telephony. You asked the local switchboard operator for the person by name. It was only the advent of automatic switching that introduced the use of numbers for different exchanges.

This is all correct but jumped over the quirky but not necessarily newsworthy story of the introduction of numbers within exchanges. For those into the quirky insert the following two sentences after the first;

Numbers were introduced, according to ATandT as a consequence of a doctor’s plan to “de-skill” switchboard operators during an outbreak of measles.
In the manual days the requested switchboard was still asked for by name.

The story was that in 1879 in Lowell, Massachusetts a measles epidemic struck. A local physician, Dr Moses Greeley Parker said that if the ailment struck all four switchboard operators at the same time that inexperienced substitutes would have so much trouble learning which name went with each of the two hundred jacks on the switchboard that service would be paralyzed. He therefore recommended that numbers be used instead.

As I said, the sub-editing was entirely appropriate. I only include this in the blog for its amusement value.

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How does an industry do this to itself?

I found the juxtaposition of two items today of interest.

The first was reporting of the decision in the latest ACCC v Optus case. The court has thankfully found that advertising a plan as 150GB where there are circumstances where you don't get 150GB is misleading.

What is disappointing is that Optus tried to run a defence that really the ad didn't matter because the matters were fully explained to the customer in the sign-up process. Thankfully the judge, noting

Lurking beneath this evidence is the proposition, not expressly articulated in argument, that consumers do not rely upon advertisements and cannot, in those circumstances, be misled by them. That proposition sits uncomfortably with the size of the advertising campaigns in question which is clearly substantial and inconsistent with an exercise conducted sheerly for the merriment of its designers.

I have, however, previously written of more recent Optus conduct that I think is equally misleading but thus far not prosecuted.

This conduct reflects the kind of thinking that was witheringly critiqued by David Howarth from CHOICE at the ACMA Sydney hearing on last Wednesday. He has undertaken to provide that material as a supplementary submission.

But how is it that the combined intellectual powers of lawyers and marketers combine to convince themselves that such an add is not misleading? Forget the legal definition - it must be misleading as an ad if you think you need to explain it in detail in the sales process. Let alone the underlying behavioural characteristic that - no matter how long the sale process - consumers once convinced they want to purchase something self-select out contrary information.

A more telling example was given in the Four Corners report on bundling in telco sales to small business. This model revolved around bundling a lease for "office" equipment in a telecommunications service contract, the lease payments for which are supposedly paid for out of "rebates" from the telco service model. Where this deviates from the mobile phone handset proposition is that there are seperate contracts and the term is even longer.

Ignoring the matters in these cases that otherwise involved straight fraudulent addition of items to the leases, at the core the issue is the misrepresentation that the goods are "free". At the point later in the sign up process where the fact there is a second contract with a repayment is made clear the salesperson used soothing.

The conduct is exactly the same. In some ways it is worse because the telco industry doesn't have rules about income assessment but the finance industry does - and there are separate finance contracts.

I was somewhat surprised to see ACCCC Chair Graeme Samuel being focussed on the conduct of the dodgy telcos, when the conduct of the finance firms is more reprehensible - they are the ones dealing with a dodgy "agent". If a telco sells through dodgy door-to-door sales the ACCC goes the telco, but if a finance company sells through a dodgy telco it looks like the telco is still the target.

Do I live in a parallel universe where I expect people to behave ethically? Don't these people get it that business is built on trust?


Novae Meridianae Demetae Dexter delenda est

A Crikey plug

I normally resist linking to stories behind paywalls, but Bernard Keane today has used discussion of "food security" to outline the basic process of creating an effective narrative;

you establish there’s a significant problem, then you provide a solution, explain the solution and how you’re going to implement it and who will benefit.

This is not only sage advice on how to wage a campaign, but also valuable advice on how to critique one. The magic is in establishing there is a problem.

Where many people fail in trying to pursue this is that they define "problem" in their terms, rather than in the terms of their audience. The NBN provides an interesting background. The ALP successfully defined the "problem" as Australia's position on world broadband rankings and chose to solve it by a Government investment. That has been a successful strategy.

The coalition is trying to counter by identifying all government spending as bad. Certainly Malcolm Turnbull has been pursuing the suggestion that itb is the Government expenditure that is bad (on this point I'm a bit confused because someone alerted me to Malcolm writing something on this line in Online Opinion, but all I can find are posts by "Shadow Minister" which is clearly not him.)

The coalition is barking up the wrong tree - after all Telstra privatisation was never popular, especially in regional Australia.

The coalition is also failing in the most common way for combating a strategy as outlined by Keane. The necessary response once the idea of the problem has become established is to acknowledge the concern and provide an alternative solution. It does not work to deny the problem.

The example here is climate change. The coalition did not succeed with a Minchinite denial strategy, what worked for them was the Abbott acknowledgement of the problem but an alternative solution (spend not tax).

As to the actual subject of the Keane post - food security - the Australian food industry is running a campaign effectively for protection on the grounds that we need food security. Personally I don't understand why they think we should be concerned about food security.

If it came to a shooting war we would have no problem feeding ourselves. We even have enough manufacturing facilities and skills to even fabricate weapons and craft. However, I think we have no capacity to produce any electronic goods. Even our US allies now import most of their electronics from North Asia.