The Tyranny of Density

Dr. Terry Cutler

Originally published: Business Review Weekly January 2002

Last month this column started to look at the question of broadband networks. Some countries like South Korea are forging ahead of the rest of the world. Meanwhile other country markets, like the United Kingdom and Australia, seem to be making heavy weather of the shift to broadband, high bandwidth connectivity.

In Britain a website is soliciting signatures for an online petition calling for Government action because "the wheels have come off the UK's Broadband-Wagon" More like "broadbanned", moans UK businessman Barrie Desmond! Check out this broadband consumer activism at www.broadband4britain.co.uk.

In response to last month's column Glenn Barry, an Australian who has spent time in South Korea, emailed an instructive checklist of success factors for broadband in that country. Here is Glenn's illuminating assessment of Korea:

  1. Government policy in Korea promotes broadband Internet access.
  2. Housewives can buy low cost computer connection packages from post offices.
  3. Free computer training for housewives.
  4. My housekeeper had a computer in the kitchen.
  5. PC 'Bangs' are everywhere, these 'Internet Cafes' are an alternative to home life for people who live in small apartments.
  6. Telecoms delivery is very efficient. Local teams are on call, one hour or less, for an installation or a technical fault.
  7. Computer games: Koreans love online games.
  8. Relentless marketing of broadband deals.
  9. Small space living quarters mean kids cannot entertain at home, so they reach out with instant messaging.
  10. The Government has a policy of English as the second language, so most educated younger Koreans can read English and thus access overseas content.
  11. It is a very small country, easy to wire.
  12. The population profile is skewed to youth.

Mulling over this, I spent much of the Christmas break struggling to stay awake while reading the Productivity Commission's final report on Telecommunications Competition Regulation. Many of the recommendations about fine-tuning the regulatory system are sensible, but they won't solve for broadband futures! The reason is because we often forget some of the really basic characteristics of the Australian market that make us different from countries like Korea on the one hand and the United States on the other.

Years ago Geoffrey Blainey summed up a lot of Australia's challenges under his slogan "the tyranny of distance". A lot of Australia's telecommunications challenges can be summed up under the phrase "the tyranny of density".

Australia is a small market for telecommunications, a long way from the rest of the world. It is never likely to be an intense hot spot of competition. Thus a primary reliance on competition policy is not likely to work, especially outside the major central business districts. The economic logic is pretty basic.

Multinational telecommunications operators and local players like Telstra are competing in a global market, and all of them are under increasing shareholder pressure for returns. At a given cost of capital, any telco will look to invest in markets which maximise its rate of return on funds employed. Hence even if small Australian regional markets can offer a respectable return on investment, these areas need to compete with markets offering a higher return or greater growth potential. When there is competition for investment capital, as there always will be, it is clear that low density, lower growth market segments will lose out regardless of their attractiveness on a standalone basis. To ignore this fundamental reality would be to do a King Canute act of defiance against the tide of basic market forces. The challenge in this situation is whether we can identify and promote "natural owners" for these standalone regional markets with a different "risk/return" profile to the multinational operators. Regrettably, the Productivity Commission's terms of reference precluded any consideration of structural issues.

The second basic fact of industry life is that Australia is a huge island continent, with its small population concentrated in a few major metropolitan centres.

For a century, however, Australian telecommunications has operated under a nationalistic monopoly model which treated the entire continent as a single market. Standard, universal service models entrenched a "one size fits all" policy and operational approach. This policy assumption simply does not work under a competitive model. Not all parts of the Australian market are the same. Australia is a collection of distinct micro markets each with their own requirements and characteristics. A mass market or a mass policy approach is unlikely to provide the best service solution at a local level. Telecommunications infrastructure needs the same customised solutions as have evolved in broadcasting, personalised web services, water and electricity.

Ironically, a "one size fits all" approach to standard services means that the worst off will tend to end up with worse service outcomes than might otherwise be the case. Current regulation means that a 90% solution for a regional Australian market could not be provided. These people would get no service. Solutions geared to high density city markets are not likely to be the solutions for low density markets. Unfortunately, few major global players have a primary interest in investing in low density broadband communications solutions. But there are a lot of low density markets, in aggregate, around the world! This is one R&D area in which Australia could carve out a significant niche position.