Networks have driven growth across the ages. Britain’s industrial predominance in the 18th and 19th centuries was as much dependent on building toll roads, canals and railways as it was on the application of new technology.
Solving the transport problems complemented the reduced unit costs of production that stimulated demand and brought prosperity. In the 20th century continued growth and rising living standards depended on new networks - the National Grid for electricity, telephones, motorways, gas and water distribution among many.
A key characteristic of networks is that, typically, they have high overhead costs but relatively low marginal costs. They become economic to operate with large numbers of users all paying a small contribution.
Typically also, there’s a correlation between user numbers and individual user benefit. There’s no point to a telephone network with just one user. The more users a network attracts,the lower the average cost and the greater the benefit to individuals - a virtuous circle of exponential growth. This gives providers an important incentive to avoid duplication and achieve interconnectivity.
What’s the message in all this? Well it’s almost trite to point out that the internet is the network of the 21st century - especially so for economies such as the UK’s, which is highly dependent on high value added activities.
The power of the internet comes not just from itsworldwide penetration, but also from the speed of its communication and of its data transmission. Despite the urgency of the internet market, however, the UK is falling badly behind in this area, to an extent that is almost scandalous.
The government has found £530m to improve rural broadband coverage, but only £150m for the Super-Connected Cities programme. Our optical fibre penetration is now behind that of Lithuania, Turkey and Romania as well as most mature economies. The ambition falls far short of the ultrafast speeds (100mbs as a minimum) that most other countries aspire to.
In Birmingham we wanted to do something to tackle the situation. We proposed investment in affordable ultrafast broadband access to fibre to premises (FTTP) for small and medium enterprises in our creative quarters of the city - the digital district.
We believed this would encourage more start-ups in sectors that needed to grow in the city and in the UK. In the absence of any investment from the private sector (mainly BT and Virgin Media, which have a virtual monopoly of the fibre network) we put a case to the European Commission that there was market failure, including consultation with the two oligarchs. The EU Commission agreed the case, and we were all set to help drive growth.
At this point, BT and Virgin Media objected to the state aid approval, and effectively prevented the implementation of the programme until the legal process was resolved.
It was predicted this would take years, and would certainly extend beyond the 2015 deadline for the expenditure of the Urban Broadband Fund. The key objection from BT and Virgin Media was that they did not want to open their networks to access from the new providers, which the commission saw as essential and they had a legal obligation to agree. The point is that multiple networks are illogical for the country as a whole - there is no need for two National Grids.
So in order to make some progress Birmingham agreed to a voucher scheme that allowed BT and Virgin to charge monopoly prices to SMEs, which offset the high cost with the voucher. Instead of providing a cheap network we are subsidising two huge corporations to give the appearance of lower entry costs.
The situation is analogous to one where, for example, water companies only provided water to standpipes and customers had to meet their needs by filling up buckets and carrying them home. The companies will provide full pressure water supplies if the user is willing to pay all the costs of a new pipe from the standpipe to the home or business premise. Usain Bolt is running from the reservoir to the standpipe at which point he’s passing the baton to a tortoise.
We are throwing massive economic opportunities away while the rest of the world is overtaking us. The business case for UK plc to invest in FTTP is immeasurable. As a substitute we are raising taxes and cutting public spending. It simply doesn’t make sense.
Stephen Hughes, chief executive, Birmingham City Council