COLUMN: TELECOM ECONOMICS - The investment imperative
Benoit Reillier examines the economics of bandwidth 
The relationship between infrastructure investment and economic growth has been established by many studies. In our ‘knowledge based' economies, investment in new communications infrastructures, in particular, is seen as increasingly critical to long-term economic growth.
In much of the developed world, most of the fixed line telephony and internet services used today are based on old copper pairs that were designed for voice telephony in the early 1900's. While clever technological innovations (such as DSL technologies) have recently allowed operators to breathe new life into these old local loops, this is not quite the gift of immortality that some may have hoped for.
But replicating or upgrading the existing local loop with new, fibre based technology to facilitate the availability of high bandwidth services is a difficult and costly exercise.
And while some argue that demand may not yet exist for very high bandwidth, it is worth keeping in mind that Moore's law (that roughly states that the processing power of computer chips doubles every two years) has been holding remarkably true since the 60's. There is no reason to assume that this trend will stop overnight and therefore every reason to believe that tomorrow's digital cameras, TVs and computers will have a higher resolution than those of today. The processing power of our computers and the storage space required will also increase accordingly, and so will bandwidth requirements. If the infrastructures cannot cope, they will increasingly represent a bottleneck.
Operators are therefore increasingly considering the roll out of so called New Generation Networks (NGNs). Given that copper does not carry signals well over long distances, there is a direct relationship between how much copper is used and the speed/quality of services provided over it. The key question, therefore, is: how close to our homes will these new networks be rolled out?
Many operators talk about NGN investment in the context of using fibre optic in the core of their network. Needless to say, while helpful overall, from an economic viewpoint this is not the kind of transformational investment plan that would drastically enhance the experience of users as it would leave the ancient copper loop infrastructure intact - and not getting any younger. Some talk about New Generation Access (NGAs) networks and these could also have different characteristics that may or may not provide users with the full new generation experience. FTTH is more costly than the alternative Fibre to the Cabinet (or Curb) solution, however it offers higher speeds and perhaps more importantly, greater reliability as the network is no longer dependent on a copper line to the home. In the US, Verizon is rolling out FTTH to around 19 million households, while other US telcos are following a FTTC strategy. It is not clear yet as to which strategy will be the most effective. In both cases, NGA requires very significant investments that operators (and their shareholders) are often reluctant to commit to in light of the uncertainties associated with the financial returns available.
The New Regulatory Framework being negotiated in Brussels at the moment will have a significant impact on many of the underlying economic drivers that operators are considering, and it is likely that large scale NGA investment plans will be somewhat delayed in a number of countries, at least until more regulatory visibility is provided, probably at the end of the year. It also requires regulators to focus on how regulation impacts investment decisions, in the short and long term, rather than simply transferring wealth from suppliers to consumers.
Of course other technologies, often wireless based like the much hyped WiMax standard, are possible substitutes for local loop investment. Users are, in fact, technology agnostic and couldn't care less about the underlying delivery mechanisms as long as the quality, reliability and features expected are made available at a reasonable price. One thing is sure though, our centenary copper pairs are unlikely to provide the required communications capabilities that our economies' future growth will require.
Benoit Reillier is a Director and European head of the telecommunications and media practice of global economics advisory firm LECG. He can be contacted via: breillier@lecg.com
The views expressed in this column are his own.
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