Tuesday, May 15, 2012

LSE/Convergys study: Costs and Benefits of Superfast Broadband in the UK


Some interesting insights in a recent study by the London School of Economics (LSE), commissioned by Convergys Smart Revenue Solutions, on the costs and benefits of superfast broadband in the UK (commentary from the BBC here and ISP Review here).

The report recognises the benefits of broadband but notes these are difficult to quantify:
"Because it is so new, so far there is little evidence of effects specific to it and no evidence yet of long-term or large-scale effects...there appear to be causal connections between broadband deployment and the growth of the market economy, although the direction of causation is not always clear."
On the challenge of bridging the digital divide:
"Low Internet take-up among older age groups limits the rate at which society can be said to be “fully wired”: no matter how widespread high-speed coverage may be, approaching 100% take-up is likely to take another 15 years...Benefits accrue most easily to early adopters. People who might benefit most from new applications in their own homes (for example, the elderly or disabled) are likely to be later adopters and to need the most support to realise the benefits. So even where there is an overall social benefit, it may come at the cost of (at least temporarily) increasing inequality."
The report suggests that UK broadband strategy should focus on coverage over speed in the first instance, as the UK is "far from deriving all the benefits available from basic broadband". The Government's commitment to ensure universal 2Mbps availability by 2015 is "on course":
"Widespread provision at lower speeds should be given preference over partial provision at higher speeds, and problems which result from difficulties in adapting to rapid change are not likely to be solved by even more and faster change...there is a strong case for governments (in various OECD countries) to subsidise the deployment of basic or fast broadband to households not reached by the market. However, the case becomes progressively weaker as the provision of higher speeds to all households is considered. Fundamental to this conclusion is the view that most new activities made possible by broadband are already possible with basic or fast broadband: higher speeds mainly allow the same things to happen faster or with higher quality, while the extra costs of providing higher speeds to everyone are very significant."
Thus the demand case for superfast broadband is not yet clear:
"Early adopters have been prepared to pay a small premium for superfast broadband. However, though they have changed how much they use some existing applications, they have not as yet found any compelling new applications. Mass take-up might depend on large-scale adoption of Internet video for entertainment, with innovative pricing plans that would appeal to potential new users, such as special offers for off-peak entertainment."
Similarly, the key benefit of superfast broadband at the moment seems to be doing the same things faster rather than new things:
"...most superfast broadband users were satisfied with their change to superfast broadband (despite the extra expense) and reported improved Internet experiences, including more responsive browsing. These users had increased their streaming of high definition and standard definition television programmes and films, and, to some extent, their video calling, file sharing and online gaming; however, the nature of their online activity had not yet changed fundamentally."
I think this concept of "innovative pricing plans" is the underpinning rationale for Convergys commissioning the study: Convergys Smart Revenue Solutions provides "best of breed billing and customer care products, which are embedded with real-time intelligence". The report suggests that new forms of charging and billing provide a means to reduce costs and drive up revenues from subscribers, helping service providers to deliver a return on the significant investment needed to build new broadband networks and also potentially attracting new Internet users, helping to bridge the digital divide.

An interesting footnote illustrates the bandwidth requirements of streaming, which currently seems the key driver behind takeup of superfast services:
"If MPEG-4 coding is used, high definition and standard definition television require downlink speeds of about 10 Mb/s and 2 Mb/s (respectively) for streaming, and 10 gigabytes and 2 gigabytes (respectively) might be downloaded during the viewing of an entire full length film. Superfast broadband is needed for these applications only if there are multiple simultaneous viewings per household, the uplink is used heavily (perhaps for high quality video), or fast broadband falls well below its intended downlink speed (perhaps because of poor wiring, or the use of WiFi, inside the house).
My personal view is that this is a chicken and egg situation. New applications that can exploit the additional bandwidth superfast broadband provides will emerge as takeup increases. The growth of social networking provides a parallel: this occurred not only as a consequence of increased bandwidth as first generation broadband became available, but also as a result the move from a pay-as-you-go model (dial-up) to flat-rate always on connections, as these support interaction with social networking sites far more effectively.

I agree with the report's assertions that the demand case for superfast broadband is not yet clear. However, upgrading connection bandwidths from, say, 5Mbps via ADSL to 30Mbps or faster services represents a fundamental step-change which will unleash in time a similarly new set of applications and services as takeup grows to the point where the business cases for these become viable.

We just need to be patient in the meantime.

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