09/09/09Next-generation broadband networks promise much faster transfer of information and services, promoting overall national productivity and prosperity. For that reason, public policymakers are stimulating or even making significant investments to establish such networks. Yet there are significant hurdles to deploying next-generation broadband. Private investment in the sector will lag until there is greater certainty over revenue, regulation, and technology. Government policymakers, who are in the best position to create an environment that is conducive to broadband networks' development, are the ones who must overcome these hurdles.
World leaders who have committed to building next-generation national broadband networks (NGNBNs) compare them to other infrastructure, such as roads and airports, in terms of their importance to economic growth. Nations that don't make this commitment risk getting dominated by those that do, as countries that communicate and share information boost their economy and future prosperity.
The Uncertainty Hampering NGNBN Growth
Next-generation networks would enable access speeds up to 30 times higher than current networks, but cost as much as 10 times as much per subscriber to deploy. Many policymakers believe that NGNBNs are worth the price. Investors, however, are uncertain of their returns, and thus nationwide deployment of next-generation networks is still very limited. Deployment of NGNBNs is highly risky for operators. It is an open field of competition, where the rules are unclear, the risks unknown, and the payback uncertain. Investments in NGNBNs are front-loaded and also irreversible, which is holding investors back until they understand the business model and the extent of the risks. Operators are asking three important questions.
How much will this really cost? A nationwide NGNBN may represent the single largest infrastructure investment ever made by a telecom operator: The costs of deploying a NGNBN in major markets may be up to 10 times the EBITDA of an operator's national business.
How will we capture revenue from the network? Operators' reluctance to spend on a new network stems from the fact that they will pay to build it, while competitors who don't have to make that investment can capitalize on it. Telecom operators face competition from players in adjacent industries, including cable, and from application providers like Skype. Increased competition and new business models are fragmenting revenue streams, reducing the amount that network operators can capture..
How will the networks be regulated? Whether NGNBNs can generate returns depends on the governing regulatory regime. However, in most countries, these are still being defined. Government regulatory tools for first-generation broadband, including local loop unbundling and interconnect regimes, may not apply to NGNBNs.
Choosing the Right Approach to Government Involvement
Governments have three levers for building out NGNBNs, which are not linear nor mutually exclusive: Governments can choose to employ one or all of them. The choice depends on the government's objective in deploying a NGNBN and the market obstacles that it must overcome. Two factors determine the best option for governments to accelerate NGNBN deployment: The expected coverage if driven solely by market forces; and the proportion of the population that would be able to afford next-generation services offered by the market, without government involvement.
1. Introduce new business models. Traditionally, telecom has been a vertically integrated sector, with operators owning and operating all elements of the network while serving end users. This vertical integration is inhibiting investments in NGNBNs, with operators wary of incurring deployment costs and then sharing the infrastructure. Governments can solve the problem by introducing multilayer models, with some capital-intensive but low-risk operations, and other entities that operate more competitively, with higher risks but higher returns.
Introducing new business models is the most appropriate approach when the government expects a market-driven solution to be affordable for only a limited percentage of the population. These new business models would alter market dynamics, thereby increasing the coverage and affordability of a NGNBN. Governments need to approach stakeholders to highlight the benefits of the new model and enable the market to meet the investment demands of the next-generation broadband network opportunity on its own.
2. Invest in network infrastructure. Direct government investment in NGNBN infrastructure reduces the magnitude of investment required from the private sector and accelerates NGNBN deployments. Government investment comes with inherent risks, including the potential to dissuade private-sector investments. A robust risk/benefit analysis is imperative. In making their investment, policymakers have to consider three distinct options: direct ownership, public-private partnerships (PPPs), or concessions.
Government investment in network infrastructure is best suited to situations in which the market will deliver an NGNBN that is affordable but has limited coverage, as government investments can ensure nationwide availability. After deciding an investment is warranted, governments must next decide which investment to pursue. If existing or potential coverage would require a substantial government investment, it may be best to own the infrastructure directly. However, if there is a reasonable deployment of NGNBN infrastructure already, a PPP or concessions model may be more suitable.
3. Stimulate demand. Many consumers are unaware of the life-changing applications next-generation broadband can bring them. Governments can address this by offering public services through next-generation networks, whetting demand for other services, providing some assurance to network operators that revenue will follow. "This lever is supplemental to introducing new business models and investing in infrastructure. Demand stimulation is appropriate in a scenario in which there is widespread coverage but services are not widely affordable or uptake has been limited," stated Sabbagh.
Getting Up to Speed
There are three key elements that governments considering deployment of an NGNBN must consider. It is vital they get a strong grounding in the needs of their markets, the likelihood of private-market success on its own, and what the market requires from the public sector—whether regulatory definition, funding, or some other critical action. Second, they have to be willing to engage in dialogue with stakeholders to address their concerns and ensure their cooperation. Finally, they must set clear goals for themselves on the kind of reach they are hoping to achieve, and at what levels of affordability—and then design the policy.