It seems as though the Australian government has adopted a new theme song:
“Anything you can’t do, we can’t do better…”
It’s the only reason we can come up with for the decision to build a publicly funded broadband network, providing fibre optic cable to 90% of Australian homes.
The original plan was for the government to stump up just under $5 billion, which would have funded about half of the projected cost. In that case though, the fibre was only going to stretch to the box at the end of the street.
Now, for just an extra $16 billion, you’ll get fibre optic cabling right into your home.
What more could you ask for. The total cost is estimated to be somewhere around $43 billion. But how often to public sector projects come in under budget? In less than two years the estimated cost has increased four-fold – and they haven’t even started building it yet.
Worse than that, the taxpayer won’t get a return on the investment for at least 50 years – probably longer, but I’ll get to that shortly…
In fact, our guess is that over the eight-year timeframe for this project you – the taxpayer – won’t get much change from $100 billion. Where did we get that number from? Thin air. We made it up. But as a guess it’s probably got as much value as the official estimates that tell us it will ‘only’ cost $43 billion.
It’s often claimed that when the private sector can’t provide something it is up to the government to step in and take over. We don’t agree. The government claims that none of the proposals it received from the private sector were up to scratch and so it’s going to build the thing itself.
Clearly, if there was a dollar to be made out of this the private sector would be in there building the network already.
And we also question just how keen the private sector will be to get into a long-term deal with any government at the moment. And that’s partly of the government’s own making.
The reason capitalism works so well is the ability of the buyer and seller to come to an agreement on price that is beneficial to both parties. If the seller is charging too much then it will deter buyers.
So can we really expect a government controlled entity to provide a service that is competitively priced so it is worthwhile for the company to operate while still offering good value to the customer? You only have to look at the public transport networks to see that it is not possible.
The only companies that will make any money out of the deal are those in the construction and telecommunications industry that will build it. The company or companies left to operate the network will have no choice but to run it either at a loss or at best on a very thin margin.
In terms of constructing the network, there will be plenty of takers. But actually running the network will be a different story.
So anyway, let’s take a look at the numbers. To start with, as a taxpayer are you happy with being forced to contribute at least $1,000 towards getting super fast broadband? Because that’s your taxpayer funded contribution.
And it’s providing the exposure remains at $21 billion.
As nice as it may be to get internet access at 100Mbits per second, is there really a commercial demand for it? And what will the cost to the user be for the service?
We assume that under the original $10 billion costing, the service providers had established a pricing matrix that would make them a profit, and keep it attractive for consumers to buy. Now that the costs of the service will be four times greater, what impact will this have on the pricing?
Will it cost the consumer four times as much per month? Probably not. But it will add to the cost for the consumer.
Telstra have around a 50% market share for broadband, so we’ll focus on their numbers. According to Telstra’s 2008 annual review, it had an excellent year for its Bigpond Broadband service. Revenue increased by 49%. That’s impressive by anyone’s standards. Hats off to Sol and the team for that effort.
However, that still only took total broadband revenue to $1.8 billion.
An equally significant number is the ARPU – that means Average Revenue Per User. That stands at $53.02. We don’t know what Telstra’s profit is on the broadband segment, but Telstra’s overall profit margin is around 15%.
So, at the moment, consumers of the Telstra Bigpond Broadband product are willing to pay – on average – $53.02 for current available internet speeds. And don’t forget that the Telstra service is among the most expensive broadband services on the market.
So, for the sake of round numbers, let’s assume that consumers across all broadband providers are currently prepared to pay $50 per month for internet access.
What will consumers be prepared to pay for a service offering speeds up to “100 times faster” than current services? We can guarantee they won’t be prepared to pay 100 times the cost. In fact, our guess is any company will struggle to get the consumer to pay an extra $10 per month.
So if we assume there are about eight million households in Australia, each willing to pay $60 per month, that’s total annual revenue of $5.7 billion. And if we use Telstra’s 15% profit margin, the venture could expect to make profits of around $855 million per year.
At that rate, the project would need to bring in this level of revenue for fifty years before it paid back the costs of construction. And that’s assuming the costs stay at $43 billion.
Even if users are happy to pay $100 per month that’s still thirty years before the cost is paid back.
The upshot is. How is this going to make any money and is it a worthwhile use of taxpayer money? And to make things worse, the portion being funded by the taxpayer isn’t going to come from cuts in the budget, it’s going to come from increased debt.
Notice how easy it is for governments to go further into debt once they’ve crossed the threshold. Maybe the Future Fund will tip in a few billion as well.
Other Stuff on the Markets
The Reserve Bank of Australia cut interest rates by 0.25% yesterday. So far the banks seem reluctant to pass any of this onto borrowers. In reality they don’t need to. They’ve primed the pump enough to increase demand for home lending.
And based on the make-up of their balance sheets they are already at the extreme of what they can possibly lend out. Plus if they cut savings and term deposit rates too much, there will be little incentive for investors to keep holding cash which would make their balance sheets even worse.
Another down night on Wall Street. The Dow Jones Industrial Average dropped over 2%. There’s not much more we can add over what we’ve written before – it’s stuck in a trading range pending better or worse news.
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