The economics of broadband revisited

It has been a few years since I last looked at the economics of broadband. What are the business case drivers and roadblocks that arise when pushing network upgrades into suburban and rural networks?

As the CRTC begins its review of wholesale internet access, the business case for network investment, and the economics of broadband expansion, should be significant considerations.

A few years ago, I wrote “The economics of broadband expansion”. In that piece, I looked at the economics of broadband expansion from an engineering economics perspective.

In considering the economics of broadband, look at a piece I wrote in 2016 (“FTTH business isn’t binary”) when Minister Navdeep Bains rejected an appeal of the CRTC’s 2015 wireline wholesale decision providing fibre access, but only on a disaggregated basis. That decision says, “the provision of aggregated services will no longer be mandated and will be phased out in conjunction with the implementation of a disaggregated service”.

In each of these, I explain that there is a boundary defined as where the business case for network upgrades goes negative. We know, based on the design of all of the government broadband programs, that there are communities or regions that simply cannot generate sufficient revenues to justify the cost of building broadband facilities. A government subsidy intends to provide just enough money to make the business case go positive. That is, the subsidy provides a reasonable opportunity for a return on the private capital invested.

No subsidy is generally required in areas with an urban population density, other than remote areas that may need backbone transport. So, we have urban areas that have no need for a subsidy because the business case is positive. There are many rural areas that need a subsidy because the business case is negative. A kind of contour map can be drawn defined by where the business case for fibre construction is barely at break even.

That was the concept more fully discussed in “The economics of broadband expansion”.

But let’s go back and look at the ‘urban’ side of the boundary line. That boundary is defined as precisely where the business case goes from positive to negative. Homes on the boundary effectively have a net present value (NPV) of revenues less costs of zero. The boundary defines a form of digital divide.

What happens if wholesale and retail revenue assumptions change? If revenues increase, the boundary pushes outward. More homes (on the ‘rural’ side of the boundary) would potentially now have a positive business case. On the other hand, if revenues decrease, the boundary contracts and the business case is no longer positive for as many homes.
I wrote about the CRTC’s latest review of wholesale internet access a couple of weeks ago. In its new review, I mentioned that Bank of America has said “the key will be at what rates.”

Why?

A business case looks at whether the inward cash flows from incremental revenues are sufficient to cover the incremental costs of building broadband facilities. The revenue forecasts clearly change under the CRTC’s preliminary view of the wholesale access model.

The Commission invites comments on several issues, including its preliminary views that (i) the provision of aggregated wholesale HSA services should be mandated; (ii) access to fibre-to-the-premises (FTTP) facilities should be provided over these services; and (iii) the provision of FTTP facilities over aggregated wholesale HSA services should be mandated on a temporary and expedited basis, until the Commission reaches a decision as to whether such access is to be provided indefinitely.

Despite massive levels of capital investment by Canada’s facilities-based carriers, a lot of areas still do not have access to gigabit speeds. As seen in the CRTC’s data collection, 1 in 8 urban households in Canada lack access to ultra high speed broadband.

If the CRTC doesn’t get the wholesale rates right, the boundary for positive business cases will shrink and more households will find themselves on the wrong side of digital divide for next generation networks.

That would be a failure in broadband regulation.