BSG Reports

Broadband in the Budget

In yesterday’s Budget, Alastair Darling stated government’s support for the knowledge economy and the communications sector, and set out a number of policies affecting the broadband industry. Broadly, the top-line statements were as follows.

– Government re-iterates its support for the broadband universal service commitment set out in the Digital Britain Interim Report; will consult on using Digital Switchover Help Scheme underspend to fund the policy.

– Government will review the powers and duties of Ofcom “in advance of the Digital Britain Report” so that it can “strike the right balance between delivering competition and encouraging investment”.

– Government’s doubling of the capital cost allowances to 40% could aid up to £10bn on investment in communications infrastructure.

– Government has approved the South Yorkshire Digital Region next generation broadband project.

The BSG has published its response to these measures. While we support the government’s commitment to the broadband universal service commitment, we are concerned that the proposals set out on next generation broadband will not support more widespread investment and coverage than current market commitments.

It is not clear that the one year capital cost allowances increase, while providing a useful stimulus for existing investment commitment, will incentivise next generation broadband deployment given the timescales of investment and deployment, which will take many years (although it may have some limited impact in incentivising Virgin Media to invest, who are planning small expansions to their footprint over the next year).

More importantly, the characteristics of the costs of deployment mean that specific, targeted measures are required in areas where market-led deployment will not reach, rather than a blanket subsidy across all areas including those that are already commercially viable.

However, a potentially more significant development is the review of Ofcom’s powers and duties. Essentially, this would appear to come down to re-focusing Ofcom more towards promoting investment, as opposed to promoting competition. While not necessarily opposing principles (stronger competition should spur investment), there is certainly a balance to be struck, particularly given the scale of the investment required for next generation broadband.

This reflects an issue the BSG raised in January 2004 in its 3rd Annual Report (pp116-121). There was a concern then that the focus on short-term consumer interest could drive static efficiency in the market, at the expense of the dynamic efficiencies of investment.

The announcement of this review could be a sign that this argument has found support amongst senior policymakers.

Peter Shearman, Policy Manager, BSG

BSG publishes costs of deploying fibre based superfast broadband

The Broadband Stakeholder Group (BSG) – the government’s advisory group on broadband – will today publish a report on the costs of deploying fibre based next generation broadband in the UK.

The report, produced by Analysys Mason for the BSG, sets out the costs of the various technology options in detail and explains how those costs mount up as fibre is pushed out across the country. It suggests that rolling out fibre nationwide would cost between £5.1bn and £28.8bn (depending on the technology used) and that the costs of deploying in rural areas will far exceed the costs in urban areas.

“This is the most comprehensive analysis produced to date on the costs of deploying fibre in the UK???, said Antony Walker Chief Executive of the BSG. “The scale of the costs looks daunting but the report does shed light on how some of these costs can be reduced and what the likely extent of commercial rollout will be. It should focus minds of commercial players, policy makers and regulators on the potential solutions to these challenges.???

The model demonstrates that national deployment of fibre to the cabinet (the cheapest technology option) would cost £5.1bn – this is three or four times more than the telecoms sector spent deploying today’s broadband services. Taking fibre to every UK home (using point to point fibre – the most expensive technology option) would cost as much as £28.8 bn.

The largest single cost component is the civil infrastructure (the cost of deploying and installing the fibre in new or existing ducts). The report suggests that these high civil infrastructure costs could be significantly reduced by the re-use of existing telecommunications ducts; the sharing of alternative infrastructure owned by other utilities, such as water companies; and the use of overhead fibre distribution in some areas.

The report also suggests that deployment costs will be relatively constant across higher density areas. This implies that, if a commercial case for deployment exists, the market should be able to deliver to approximately two thirds of the UK population. However, the costs of deploying in more sparsely populated areas will be significantly higher, making the commercial deployment to the last third of UK households much more difficult. “If rural areas are to be served in a reasonable time frame, thinking needs to start now about creative solutions for making them more attractive to investment???, said Walker.

The BSG’s earlier research on public sector interventions showed that there are many models for how this can be done that stop far short of large-scale subsidy, but do require the private sector to work closely with public bodies and local communities. In particular, demand stimulation initiatives, such as pre-registration schemes, localised to the level of individual streets or cabinets could prove highly effective in extending the reach of these networks.

Each technology has a high proportion of fixed costs that are incurred regardless of how many users take the service. This means that the cost per home connected (and therefore the commercial viability of the service) is highly dependent on the level of take-up. “If operators could achieve a higher than expected level of take-up in rural areas, then the business case for deployment in those areas could improve significantly???, said Walker.

“The magnitude of the costs, and how the costs differ between urban and rural areas, will be important for operators, media players and public sector organisations looking to develop their future broadband strategies” said Matt Yardley, Partner at Analysys Mason, who directed the work.

BSG Report – The costs of deploying fibre-based next-generation broadband infrastructure

BSG publishes costs of deploying fibre based superfast broadband – full press release

So what are the benefits of next generation broadband? The economic story part II

Following the earlier piece, I thought I’d briefly set out what the economic benefits are that are identified in our ‘A Framework’ report, in order to illustrate where we think value would accrue.

The largest categories of private value in the report are: doing things that we do now, but more efficiently; doing more of what we do now; and doing new things.

Each of these categories of value has the potential to be very significant. We make no attempt to quantify the last two, as it would be difficult (if not impossible) to do so.

Doing things more efficiently we have attempted to quantify. Based on 80% coverage, if 50% of broadband users saved 3% of their time, time savings worth £0.9bn per annum would be achieved (based on a value of leisure time used by government studies).

Note this is only an assumption, for indicative purposes. We would be interested in seeing any evidence that could refine this value, such as more detailed research on the activities consumers do online and how long they spend doing them.

The largest categories of wider economic value were: resilience, adaptability and policy options; and spill-over and virtual agglomeration. Again, these were not quantified as this was not appropriate, but we think these are likely to be significant in value.

The substitution possibilities created by next generation broadband would mean that the economy would be far more resilient and able to adapt to shocks, for example an oil price shock by providing alternative to travel. This also creates an additional range of options available to policy makers, which would be highly valuable in itself.

Virtual agglomeration had been identified as likely to be a big benefit from next generation broadband. Agglomeration refers to the productivity benefits of cities and clusters of activity – London, for example, has a higher productivity level than other areas in the UK. Through virtual agglomeration, next generation broadband could achieve some of the benefits of clusters and cities, and without some of the costs of cities such as congestion and pollution.

We also identified other categories of wider economic benefit, such as: an increase in competition in the economy; network effects as consumers and businesses both in the UK and across the world move to next generation broadband; reduced traffic congestion; the value created by the re-use of land and buildings no longer required by a next generation broadband network; reduced business travel; increased online backup; video distribution; and improved connectivity for SMEs. Some of these we did attempt to quantify, such as a reduction in business travel. For our estimations see section 5 of the report.

That’s the whistlestop tour of the categories of benefits we identified. We are keen to see these categories built on over time. We hope that as evidence emerges we will be able to more accurately populate this framework, to build up a more accurate quantitative picture of the benefit of next generation broadband.

Peter Shearman, Policy Manager, BSG

So what are the benefits of next generation broadband? The economic story

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.

The debate in Australia

Our recent report on the value of next generation broadband created a minor debate on itWire in Australia following a good blog article from Stuart Corner. The article captures the essence of our message on next generation broadband deployment from our recent research: it is more important to do this right than to do it now.

The size of the investment required to roll out next generation broadband in any country, the irreversibility of that investment, and the likely importance to that country’s economy and society of superfast broadband mean that the costs of getting it wrong could be significant, and that investment should occur at the most optimal time possible in order to maximise the benefits.

For the UK, our report suggests, the most optimal time is not necessarily now. There are a number of uncertainities for investors that create a large value in waiting, such as a lack of evidence of consumer willingness to pay and the current regulatory uncertainty. Over time, this value will reduce as evidence emerges and some of the uncertainties are resolved – we believe over the next 18 months or so.

Ultimately, we still believe the market is best placed to decide when and how investment in next generation broadband should be made. But this doesn’t mean we should be complacent. It is important that the work that is being done continues, including Ofcom’s work to provide regulatory certainty, the Caio review, and the work of the BSG, so that in 18 months’ time we really do have a clearer picture.

Will next generation broadband deliver next generation benefits?

New report examines economic and social value of next generation broadband and concludes there’s more value in doing it right than doing it now.

The UK could reap significant social and economic value from the wide-spread deployment of next generation broadband, according to a new report that studies how to weigh up the costs and benefits, from the Broadband Stakeholder Group (BSG), the government’s leading advisory group on broadband and digital convergence.

By looking at the potential private value (value accruing to commercial investors and consumers) and the wider economic and social value, the BSG has found that the long-term benefits to the UK associated with the wide-scale deployment could outweigh the cost of deployment, which could be as much as £16bn (to reach 80 per cent of UK homes).

However, the report does not conclude that operators should invest now. There is still real uncertainty about the extent to which investors will be able to realise enough of this value to justify investment. The BSG believes that in the short-term, there are unlikely to be significant costs associated with delaying deployment and there may actually be considerable value in waiting for a limited period in order for more information to emerge, before investing.

But the value in waiting will diminish over time and the report recommends that commercial providers, government and regulators continue to work to create an environment that is conducive to timely and efficient investment.

Antony Walker, CEO of the Broadband Stakeholder Group explains: “Next generation broadband has the potential to transform the way we do things as individuals, businesses and as a nation as a whole. It is tempting to jump in feet-first but it matters more to do this right than to do it now. There is a lot of uncertainty about issues on both the demand and supply side and much that we can learn from experience elsewhere without adverse affects in the short-term. On the other hand, the UK can’t wait too long. If widespread network deployment didn’t happen in the medium term (perhaps three to five years), then this report suggests that the UK could be losing out.

The report also warns that it will take longer to deploy next generation broadband than it took to deploy the current generation and that some areas might be beyond the reach of market forces. Communities and individuals that remain beyond the reach of commercial deployment in the long-term will be disadvantaged. Close attention must therefore be paid to the emergence of a new digital divide.

The report follows the BSG’s Pipe Dreams report published in April last year which said the UK needs to start preparing for next generation broadband by 2009. The current report, along with another on models for public sector intervention in the deployment of next generation broadband, will be launched at the BSG’s conference: Beyond Pipe Dreams in London on Monday 9 June.

CORRECTION – 23 June 2008

Please note that the version of the report launched at the conference contained an incorrection calculation of the value of spectrum efficiency. This has been recalculated as £5bn, rather than the £9bn stated in the launch version. The tables and charts refering to this figure have been altered, and the corrected report is now available on the website.

BSG report – A Framework for Evaluating the Value of Next Generation Broadband

Press release in full

BSG identifies models for public sector intervention in next generation broadband

The Broadband Stakeholder Group (BSG) – the government’s advisory group on broadband – will today publish a report identifying potential models for efficient and effective public sector intervention in the deployment and take-up of next generation broadband in the UK. It makes several recommendations for public sector bodies that might be considering such projects.

Next generation broadband has the potential to deliver significant social and economic value in the long-term. However it will be costly to deploy and will only become available progressively, leading to an uneven distribution of broadband capability across the country. If predictions about the benefits associated with these new services prove correct, then this could have a differential impact on consumers, dependant on where they lived. If this became a critical concern for policy makers, public sector interventions could be required in the future to support deployment to areas that would otherwise remain unserved.

The BSG does not advocate wide-scale public intervention in next generation broadband at this stage. However, a number of pilot projects have been proposed in the UK and these could provide valuable insight into different models of intervention. These pilot projects should however conform with the report’s suggestions on best practice.

Antony Walker, CEO of the Broadband Stakeholder Group explains, “Next generation broadband could be of real value to families, communities and businesses across the UK. Even though we are at the beginning of this transition, we need to be vigilant about the risk of new persistent digital divides opening up. That’s why this report is important. By testing out models of intervention now, the UK will be better prepared to intervene efficiently and effectively if it needs to in the future.???

Having examined various projects across Europe the BSG report identifies six critical success factors, which if met, should help to ensure that interventions prove efficient and effective. The report also makes several recommendations including a call for greater co-ordination at national level between public and private sector organisations involved in broadband projects.

Walker continues, “There remains a lot of uncertainty about next generation broadband and there is much that we can learn through well designed pilot projects. However, we’d like to see better sharing of experience at a national level – from planning to evaluation – and more cooperation on common ways of doing things, like technical standards and the development of wholesale products. We don’t want to see a patchwork of disjointed networks emerging that lack the scale to succeed.???

The BSG believes it is appropriate to encourage next generation broadband deployment in areas of new build, regeneration and redevelopment, but argues that pilots must have a clear rationale and must attract multiple service providers in order to offer choice to consumers.

The report begins with a practical definition of efficient and effective public sector intervention. It then examines various public sector interventions in next generation broadband across Europe. Based on this analysis the report categorises the main reasons for intervention and different approaches to it. It finds several common issues in the projects it examined from which the critical success factors and recommendations made in the report are based.

The BSG, with the support of the South East England Regional Development Agency (SEEDA), commissioned Analysys Mason to write the report in early spring this year. It will be launched alongside a report on the social and economic value of next generation broadband at the BSG’s conference, ‘Beyond Pipe Dreams’ in London today.

BSG report – Models for efficient and effective public-sector interventions in next-generation broadband access networks

BSG identifies models for public sector intervention – full press release

Prospects for next generation broadband

On Monday, 16 April 2007, the Broadband Stakeholder Group (BSG) launched a report on the prospects for next generation broadband deployment in the UK.

Broadband is already the critical enabling infrastructure of our modern, knowledge-based economy and is an integral part of many people’s lives. Next generation broadband is widely regarded as a key enabler for our future economy and is expected to bring significant benefits to the economy including improved productivity and innovation.

The report examines the potential demand for high bandwidth broadband; the factors likely to affect market development and network requirements; the likely developments in capability and capacity of access network; the constraints to investment in next generation networks, content and services; the transition from the current model to future; and the role of public sector intervention. It also makes several recommendations to government, Ofcom and the industry.

BSG Report: ‘Pipe Dreams? Prospects for next generation broadband deployment in the UK’

Press release in full