Home / Mobile / Will the government-funded broadband model invade mobile markets? – American Enterprise Institute

Will the government-funded broadband model invade mobile markets? – American Enterprise Institute

It is a truth universally acknowledged (with apologies to Jane Austen) that a telco that owes its existence to government beneficence will be strongly motivated to base its current and future strategies on the expectation that the beneficence will not only continue, but be extended.

government-funded mobile broadband

Via Twenty20

Industry advocates in the United States would be well-advised to take note of what is occurring in markets where government funding and regulations have created entire telecommunications market segments that rely on ongoing government intervention to survive. Just this week, New Zealand firm Chorus — the recipient of around 70 percent of the government’s funding for the nationwide ultrafast broadband network (UFB) — proposed that it be favored to deploy New Zealand’s first (and therefore likely only) “national” 5G mobile network, using the same structurally-separate open access model that underpins the UFB. Presumably, the firm was looking to the same government-funded capital model that has allowed the fiber network to be deployed earlier and to a wider footprint than would be the case if investment was left to private sector operators seeking a commercial return on the funds invested. Such a proposal for funding and regulatory interventions in mobile markets may be novel in developed countries, but South Africa’s Electronic Communications Amendment (ECA) Bill proposes exactly this arrangement in that country.

At the core of the Chorus and ECA proposals is an argument that new networks are costly to build, and it is inefficient to have more than one of them, especially in countries where access to capital is problematic. Why, for example, should there be three towers in a town, when one tower would do the job if only the three operators shared the services provided by it? The same sum could be used to build a more widespread network, so more people would have access to the new technology.

The problem is that for single network/open access arrangements to “work,” the government must pick the winner who gets to build the network, sell all the services, and hence get all the revenues — as well as providing the concomitant regulations dissuading rival operators from building their own networks and thereby undermining the economic case of the  government-subsidized one. It might look like the arrangement favors network innovation, but the result is likely an anticompetitive quagmire. Government intervention typically leads to some form of protection from competition (either explicit or implicit) for the favored firm. In the absence of real competition between infrastructures, dynamic investments in the next generations of technology are less likely to occur.

This lesson has already been well learned on fixed-line telecommunications markets. In the European Union, Australia, and New Zealand, for example, legacy copper network operators have, to a large extent, been “protected” from competition from next-generation fiber networks because open access regulation makes the case for competitors to buy services from the incumbent and resell them (augmented in small ways) a lower-risks prospect and hence far more compelling than building their own networks. The incumbent benefits, because it gets the revenues for serving the whole market, whether it or its rivals sell the final goods. The life of the (single) legacy network, and ability for the incumbent to earn returns by “sweating existing assets” is prolonged. However, consumers bear the costs because, even though new technologies offer capabilities highly valued by (at least some) consumers, the regulation militates against either the incumbent or its rivals investing in the new technology.

The “solution” to this “problem” of regulatory failure has been, in Australia and New Zealand at least, government funding of the next-generation network, which likewise must be supplied under open access agreements. But regulated open access protects the frontier network from competition just as surely as it protected the legacy. And in Australia, further regulations prevent rivals from selling services on their own networks unless they replicate entirely the (regulated) offers on the government’s network.

It begs the question why, in mobile markets where concurrent investment in multiple platforms has underpinned the rapid upgrading from early networks to 2G and 3G, LTE, and now possibly 5G (with minimal need to rely on public funding), anyone would want to adopt a regulatory model that has summarily failed to stimulate the progression from first generation copper to second generation fiber without considerable government assistance. New Zealand has three mobile operators with nationwide networks and mobile prices in the lower half of the OECD. South Africa is the leader in its part of the world in terms of mobile and smartphone uptake, usage and competitive pricing, with its mobile markets being described as one of the ruling African National Congress’s greatest achievements since coming into office.

Unfortunately, the “answer” to the question is that intervention breeds more intervention. It is unsurprising to find firms who owe their current position to government favors preferring to form future strategies on the basis of the arrangements that have allowed them to prosper in the past, rather than drawing their inspiration from aggressive competition on price and product quality with firms owning their own infrastructure. Hence Chorus’ proposition — while not necessarily best for consumers in the long run — makes sense from the firm’s perspective. However, as difficult as it is to see why a regulator or government might want to consider trading the holy grail of infrastructure competition for a mobile monopoly, the South African proposal is of grave concern.

Fortunately, in New Zealand, Chorus’ potential rivals in the mobile market have given the proposal short shrift. As one rival CEO said, “You have to admire Chorus’ play, but asking three network operators to radically change their business model and hand control over to a monopoly is unlikely to wash.” Instead, he suggested that if there was to be any collaboration or network sharing on 5G infrastructure, it would be more efficient for the operators themselves to work out some network sharing arrangements rather than allowing Chorus — or the government — to call the shots.

One has to hope that the same pragmatic rationale prevails in the US as well — and that the desire for government funded national open access 5G mobile networks is not contagious.

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