Broadband Marxism

Fast Company has a link to an article in Foreign Policy which states that “bridging the digital divide will require poor nations to reverse the privatization of their telecommunications networks.”

Politicians and economists in developing countries searching for new technologies to create jobs and spur economic growth need look no further than their desks. The most vital technology for sparking development is a familiar and unglamorous one: the telephone. In many poor nations, telephone service is available only in large citiesat a price few can afford and the more widely available mobile phone service remains expensive. As a result, at least 1.5 million villages in poor nations lack basic telephone service. Guatemala has just 65 telephones for every 1,000 people; Pakistan, 23; Nigeria, 5; and Burma, 4. By comparison, the United States has 667 telephones per 1,000 people. Manhattan alone boasts more telephone lines than all of Africa.

During the 1990s economic boom, many developing nations invested in laying fiber-optic lines, building satellite relay stations, and connecting to transoceanic cablethe high-capacity backbone elements of telephone networks that transport data. So why does the 128-year-old telephone remain out of reach for more than 3 billion people? In part, because the cost of bridging the last mile from national network to local customer vastly exceeds potential returns in countries such as Colombia, where annual per capita spending on telecommunications is just $231 (in the United States, its $2,924).

Two new technologies offer a potentially quick solution: wireless-fidelity networks (Wi-Fi) and voice calling over the Internet (VoIP). Wi-Fi uses small, low-power antennas to carry voice and data communications between a backbone and users at schools, businesses, and households, all without laying a single wire, greatly reducing the cost of traversing the last mile. Laying land lines can cost up to $300 per foot. Wi-Fi hardware is fitted to existing structures for about $10,000 per base stationa reasonable sum, considering that one Wi-Fi station can provide access to thousands of residences within two miles and that the antennas that attach to customers homes cost less than $100.

Together, Wi-Fi and VoIP can make telephone service affordable and accessible in poor countries. But for developing nations to benefit, their governments must rethink who owns the telecommunications networks. Put simply, its a bad idea to have a monopoly, whether government or private, both control the network backbone and provide retail services to consumers. Such arrangements lead to higher prices and less competitive services.

Developing countries can break such strangleholds by renationalizing their network backbones, liberating them from the retail business of servicing consumers. Although state monopolies provided infamously poor service, running a network core is easier than providing retail services. State-owned network backbones can operate on a non-profit basis, providing access to private companies that compete to service local customers in villages and towns. Its not that the ordinary bias favoring private ownership and free markets is misguided. Nor are telecommunications networks too critical a public service to be left to free markets. Rather, networks in developing countries have never been subject to real competition. Ironically, a publicly owned backbone would level the playing field and increase competition among retail providers, leading to innovative services at lower prices.

One model for success can be found in Utah, where authorities in Salt Lake City and 17 surrounding towns have formed the Utah Telecommunications Open Infrastructure Agency (utopia), building a high-speed network for 250,000 households and 35,000 businesses. The government owns the backbone, but does not sell Internet or VoIP service directly to customers. Instead, utopia is open to anyone wishing to sell broadband service.

Can the same model work in the developing world, where money and accountability are more elusive? Yes, for two reasons. First, Wi-Fi and VoIP flip the traditional telecommunications model on its head. The network backbone has only one objective (delivering data via a small set of universal procedures), leaving governments with a simpler job. Delivering local service is harder. Traditional telecommunications models are the opposite: The telephone is simple; the circuit-switched network is complex. And while a private monopolist has every incentive to charge an exorbitant price and increase profits at the expense of consumers, a public monopoly lacks that impulse. Nonetheless, to ensure that consumers benefit, an independent, nonprofit organization could jointly administer the backbone network with a government agency. To increase efficiency, the daily operations of the backbone could be leased to a private entity.

Such renationalization of network backbones would be expensive for developing countries, but the costs are not insurmountable. Governments could buy back network backbones using long-term debt funded by revenues flowing from the operating lease. A properly structured public debt issuance would assuage foreign investors fears of a broader nationalization campaign.

In developing countries, telecommunications lead to more jobs, improved health care, and higher levels of education. The renationalization of telecommunications backbones is analogous to the state-funded building of roads. Roads and highways increase a nations wealth by enabling commerce. In poor nations, the same can be true of the information superhighway, if politicians choose technology over ideology.

An interesting point – what Chris Sprigman is basically stating that telecom is a public good, and therefore should be done by the government. Maybe Atanu will have some thoughts on this, considering his PhD was on the universal service obligation of Indian telecom companies.

UPDATE: I think I went a little too far in calling telecom a public good. Atanu corrected me in his comment, and I just received an email from Chris (the co- author of the article):

Rajesh — With respect to your post on “Broadband Marxism”, the article Pete Lurie and I wrote in Foreign Policy last month, I want to emphasize that it is *not* our argument that telcom generally is a public good and therefore should be provided by the government. Rather, we argue that certain elements of a digital network — namely the network backbone — have strong public good characteristics and should therefore be provided on a non-discriminatory basis to firms that can compete to offer services on the “edge” of the network. The best way to do this will often be for government or some public-private partnership to own the network backbone and lease it out, non-discriminatorily and at a rate that is designed to allow the central network to recover its long-term average cost. This is an efficient ownership structure for a networks whose elements (the core vs. the edges) have radically different economics.

Sorry about the mistaken interpretation based on my limited knowledge of economics!

On a slightly different note, George Gilder spoke on broadband and related topics at WTF. “Just got back from Korea. No ponzi scheme, fiber gluts, bubble. Basic thing that happened was US launched BB revolution but didnt consumate because of regulatory and monetary mistakes. Korea has 40x the bandwidth per capita as US. Accomplished this in 3 years. 75% penetration of homes with real broadband (8mbit/sec+). Most DSL with rapid VDSL deployment. Dribbleware in the US. The whole economy changes. $250bn transaction on Internet, 1/3 of their economy.” [Fast Company has more.]

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Rajesh Jain

An Entrepreneur based in Mumbai, India.