So what are the benefits of next generation broadband? The economic storybsg
Following the launch of our report ‘A Framework’, I thought it would be worth setting down a few pieces about the benefits highlighted in the report. I’ll start with a general view of the economic impact the report sets out, which although substantial in terms of benefits, may be difficult in practice for investors to capture.
First, a brief note on the methodology. We have taken a bottom-up approach, examining where in the economy specific value could possibly accrue, rather than making general estimations of the impact of next generation broadband on productivity or GDP. For more on this in the report, it is worth looking at the section on ‘pseudo costs and benefits’. We also broke down economic value in to two categories – private value that accrues to investors and consumers, and wider economic value.
The report sets out a wide variety of categories where value would accrue. Some of these benefits would be captured upon deployment; others would take time, require transformations and would accrue in the medium to long term. In addition some of these benefits may be impacted by various policy agendas – for example, the role for next generation broadband in reducing carbon emissions is potentially significant depending on whether a carbon tax was introduced that encouraged substitution for emission-intensive activities.
The report suggests that these benefits are potentially very large, and in the long term likely to be larger than the cost of deploying the network. Particularly, there is likely to be significant private value that will be captured by investors and consumers. This does not mean, however, that the business case is made, and in reality there are difficulties for investors in trying to capture this value.
The report highlights three key constraints on investors’ ability to capture private value. First, to the extent that next generation broadband is an experience good consumers may not be willing to pay a premium for the service until they have experienced it. Second, creating this value may require the transformation of value chains, which may take time and would be disruptive. Third, investors do not yet have accurate knowledge of how much consumers are willing to pay, meaning that there will be difficulty in setting the correct pricing structures in order to maximise how much of the value they are able to capture.
Generally, the report calls for further work that would address these and other uncertainties. Resolving these uncertainties will be key to creating a business case that is acceptable to investors. The BSG is continuing its work programme that will hopefully shed some light on these and other issues. We are keen that further evidence is put forward that can help illuminate these, and would be interested to see any evidence others have to this end.