Research Notes

State subsidies for the deployment of broadband is a waste of taxpayers money!

Around the world there are many examples of governments that are supporting broadband projects with government financing – a support that can be compared to offering the richest people income tax exemption.

Many governments are using a great deal of resources on compiling reports, to find out how much state support they need to use to ensure their citizens access to broadband across their country. The EU sanctions these types of projects and it is politically possible to see the rollout of fibre as part of the many stimulus packages, that many countries are implementing to cushion the effects of the financial crisis.

The problem is that many governments have neglected to examine whether they can reach the same goals without state subsidies. Here at Strand Consult we cannot understand that governments have not evaluated the possibility of achieving the same goals, without needing to spend taxpayers money for these projects.

A Norwegian report concluded that the Norwegian state ought to invest between 7 and 14 billion NOK in building broadband in remote Norwegian areas. The question that Norwegian politicians ought to be asking themselves, is how the 7 to 14 billion NOK could best be put to use – as state subsidies for a high margin industry, or by keeping the money in the Treasury and achieving the same goals faster and without the need of state subsidies?

They don’t need the money!

When you examine the telco market, there are a number of different players – the traditional players (Telefonica, Vodafone, France Telecom, BT ) and the newcomers. In a number of countries the newcomers are energy companies -companies whose core business is selling energy and who are at the same time trying to make money on telco services by investing in fibre to the home.

When we examine the telco industry’s EBITDA revenue level, it is today probably one of the industries with the largest profit margins – margins that are often between 25% and 55%. Basically the telco industry creates large revenues in many parts of the world and it is a fact that there are very few other industries that can match the revenue size and profit margins generated by the world’s telcos.

Likewise the European energy sector is not exactly an industry that is battling against a lack of cash flow or revenue from their core business. Many energy companies have today a large and healthy business based on their original monopoly and continually announce high cash flow and revenue figures. At the end of the day, very few other industries can match the revenue and cash flow generated by the telcos and energy companies.
It is no secret that many countries want to encourage regional politics for the purpose of reducing the distance between cities and rural areas. But why subsidise a sector that already has a large cash flow and handsome revenues from doing business in cities? And that is rich enough to pay the necessary costs to deploy broadband for residents in rural areas and thereby give the population in remote areas access to modern broadband technology?

The future telco market – what does it look like?

The telco market is developing at an incredibly fast pace – one impressive example of this is the enormous advances in wireless technologies we have seen during recent years. Simply put one could say that both the fibre providers and mobile companies use the same backbone and the only difference is how end-users are connected – by fibre or by wireless technologies like WIMAX and 3G/LTE?

One thing is certain and that is that when you examine CAPEX per subscriber, the mobile technologies are already the most cost efficient method to get customers online. When analysing the technological development, companies like ours that are following the industry can see that the future is wireless, but even a specialised company like Strand Consult has difficulty in imagining what will be possible with wireless technologies in just 10 or 15 years!
The result of this development will mean that competition in the telco industry will increase and various technologies (copper, mobile, coax, LAN and fibre) will compete over customers and offer a multitude of different solutions at different prices via different technologies. Customers will experience a wide selection of offerings and continually decreasing prices.

If politicians are going to start using taxpayers money for subsidising an industry as large and technologically developed as the telco industry, there is no doubt that regardless of which decisions they make – they will be wrong decisions. Nobody in the political system (nor the telco or energy industries) can predict how the telco market will develop over the next 10 to 15 years. Therefore, any decision to subsidise certain providers/technologies over others, will most likely be wrong and result in distorting the market, rather than developing the market.

International experience shows that politicians and regulative authorities are nearly always wrong and that it is the customers and the market that is always right. The development we have seen on the telco market has not been driven by the politicians, but by the technological developments, the industry and not least by the consumers – that have been able to choose freely between products and the many market players.

Sticks & carrots is the path forward

Around the world there are a number of companies within both the telco and energy sector that have enough customers and revenue to cover the costs connected with ensuring quality telco services in remote areas. One can easily conduct regional politics without having to offer subsidies, today, tomorrow and for many years to come.

Strand Consult believes that one ought to implement a “Stick and Carrot” model, where politicians meet with the industry and ask the industry “what can you do for society, and what can society do for you?” In reality the political system has a number of buttons they can adjust and which can result in savings that run up in the billions – money that some politicians want to use to subsidise an industry that already has a high cash flow and high revenue. 

We are of course thinking about the possibilities that will emerge with the mobile frequencies related to the digital dividend “7-800 MHz”, the refarming of the 900 MHz area, and the frequencies to be offered regarding e.g. 2600 MHz. In addition there are similar buttons that governments can adjust for the energy sector – that is after all subject to large public regulation and taxation.

There is no doubt that the telco market players have the necessary capital to ensure that all Norwegians have access to advanced telco services. If the political system initiates a constructive dialogue with the telco players and takes optimal advantage of the buttons they can adjust, they could easily and simply reach their political goals without public subsidies and thereby avoid using taxpayers money in a number of areas, where the only result will most probably be distorting a market that has fantastic technological development possibilities.

Giving government subsidies to the telco industry corresponds to offering the richest people in a country income tax exemption.
In the following reports, Strand Consult describes the current and future mobile broadband market, and how to achieve success in broadband market.

More information:

Successful Strategies for the Mobile Broadband Market

Show me the money – The future Business models for Broadband Services

How can a Wimax operator survive in a world full of WCDMA

How to get success with Value added services on the Mobile Broadband market.

How media companies can get success on the mobile broadband market

How MVNO´s can get success in the Mobile Broadband market

Strategic workshop