Broadband crimes

Try explaining to an octogenarian in east London why she should pay for her countryside-dwelling grandson to receive broadband, when she has no interest in the service herself. UK communications minister Lord Carter is unlikely to do that, especially as it has just been revealed that he will shortly stand down from his position, but he does expect her to stump up the cash.

Indeed, the most criminal aspect of his new Digital Britain report, published today, was its recommendation that all fixed-line phone users be required to pay another £6 a year to fund the deployment of new broadband technology. The aim is to ensure that all households in the UK can receive a broadband service of at least 2Mbps by 2012.

While £6 a year is unlikely to cause much pain for most households, the principle is outrageous. A recent Ofcom survey indicated that 13% of UK residents have no interest in receiving broadband whatsoever. And yet those with ordinary phone lines will be expected to give money to privately owned companies – in which they have no stake – so that others can receive a service. What’s more, that money will be wasted if few new customers sign up, as seems likely.

The recommendations are also highly discriminatory. Households that use only mobile phones and a mobile-broadband service from the likes of Vodafone or T-Mobile, and no fixed-line services, will not have to cough up the 50p a month. Those who use no communications technology other than BT’s plain old telephony service will, even though many are worse off and attribute less importance to high-tech services than their mobile-only peers.

Despite these obvious anomalies and injustices, market watchers are busy complaining about Lord Carter’s ‘poverty of ambition’, and trying to explain why 2Mbps per household isn’t good enough. Some are even arguing that high-speed broadband is as important a utility as electricity or water. Seems it’s not only the bonus-hungry bankers who’ve lost touch with reality.

Broadband flimflam

Kevin Rudd, Australia's FTTH-mad prime minister

Two items of news from the broadband sector caught my attention this week. The first – and, unsurprisingly, the most widely reported – was the announcement by Australia’s government of a plan to spend a budget-busting A$43bn on the construction of a near-nationwide fibre-to-the home (FTTH) network over the next eight years. The second – missed by some leading newswires – was the detail that 550,000 homes are now served by FTTH networks in France, and yet just 170,000 have taken up the service.

The question that links the two is obvious: what is the point of spending so much on a high-speed network if few people will pay for a high-speed service? Whether the funding comes from the private sector, as in France, or mainly from the public purse, as planned in Australia, observers have every right to question the economic and commercial logic of such investments.

France’s operators could argue that it’s early days for FTTH, and caution against jumping to gloomy conclusions based on take-up so far. But these subscriber figures are pretty worrying. At least one of France’s operators is trying to attract customers to FTTH by offering it at the same price as DSL, a copper-based broadband technology. But France Telecom – which has made the greatest progress in FTTH rollout – is charging more. The early indication is that many customers are not prepared to pay.

For some, this is missing the point. Fibre is a lot more resilient than copper, they say, and will be able to support services in the future we can’t even imagine today. It will also be much cheaper to operate and maintain than older infrastructure. But Australia’s government is justifying its FTTH plan on the basis that it will be an important stimulus to the economy, just as the railways of Britain were back in the nineteenth century.

It’s this latter point I find really troubling. While so much investment gets channelled into the FTTH infrastructure that customers seem unwilling to pay for, there is little sign of the economy-boosting services that FTTH will support. In fact, there is nothing to stop services that sound important, like e-medicine and e-education, from being delivered using DSL, and yet they have not received anything like as much government attention as FTTH. No doubt, ecommerce has taken off in heavily penetrated broadband markets like the UK and Germany. But what type of ecommerce could FTTH support that DSL can’t?

As for teleworking, that, too, can be done by most people quite satisfactorily using DSL. The barriers that have prevented it from becoming more widespread are cultural – not technological.

Indeed, strip away all flimflam from FTTH, and about all it can do that existing infrastructure can’t is provide a multi-channel high-definition TV service – something that is available to lots of customers already over various forms of broadcasting technology.

No doubt, the nineteenth-century railway builders also had their detractors. But their supporters must have been able to rely on much bolder arguments. After all, the railways were providing a transport system where none had existed beforehand. All FTTH seems to be doing is adding an expensive layer of polish to the track.

The Chapter 11 scandal

I was discussing the rise and fall of Nortel with a former colleague the other day and ended up feeling very unsympathetic towards the Canadian firm. My ex-colleague had earlier interviewed Tzvika Friedman, the chief executive of a small Israeli manufacturer called Alvarion, which has collaborated with Nortel on a relatively new mobile-broadband technology called WiMax. Alvarion is owed US$2.4m by Nortel and unlikely to get paid (at least in the next few months) because the Canadian company is now in Chapter 11 bankruptcy protection. A fuming Mr Friedman had vowed to get his money back one way or the other – said my ex-colleague – but he may be out of pocket for some time.

Chapter 11, of course, gives a company protection from creditors demanding repayment. Whether a greedy, bonus-dispensing bank or a struggling former partner, you have no more immediate claim on a company in this position than Robert Mugabe has on the presidency of Zimbabwe.

 

Before anyone thinks I’m suggesting that ailing employers should be left to collapse by an uncaring system, I do think Chapter 11 has its place. A company stripped financially bare should be entitled to take shelter while it sorts through its problems. My issue is with companies that still have cash on their books and yet are allowed to put others at risk before paying off their debts.

 

Nortel might well have had US$4.5bn in long-term debt when it entered Chapter 11, but it also had US$2.4bn in cash. A sliver of that would have helped Alvarion, which is hardly in peak fitness. Last quarter it posted a net loss of US$4.8m. And it laid off 11% of its workforce in December.

 

Of course, the thorny issue is the apportioning of these cash piles. Nortel has a long list of creditors and others would undoubtedly argue they are more deserving than Alvarion. And, obviously, Nortel was incapable of repaying just over US$2bn of its debt when it entered Chapter 11.

 

Even so, there seems something fundamentally wrong with a system that allows companies to put others in jeopardy while they have money in the bank. If you’ve messed up badly – as companies seeking Chapter 11 usually have – then you should bear the consequences. And if that means entering Chapter 11 with an almost-empty purse, then so be it.

Hard rain isn’t falling

With talk worldwide of a US recession, soaring oil prices, and the global credit crunch, it seems natural to assume that the tech and telecoms industry will suffer along with everyone else. In fact, this doesn’t seem to be happening. According to US tech consultants IDC, IT spending in the US broadly kept pace with expectations in the first quarter, leading the company to forecast 4% growth for 2008.

True, 4% is an unexciting figure, but forecasters are more optimistic about global growth. Thanks to continuing demand in China and other emerging markets, IDC expects IT spending globally to increase by 6% this year and next. Gartner, another respected IT consultancy, is expecting 6.1% growth in IT spending this year worldwide and 5.5% next year. This is a big drop from last year’s 8.7% increase but still well ahead of forecasts of global GDP growth this year and next.

In terms of products, two of the biggest drivers of this spending will be sales of software and telecom equipment to the emerging economies. According to Gartner, software sales will increase by a compound annual growth rate of 14.3% in the five years between 2006 and 2011 in the developing world, compared to just 8.3% growth in the mature economies. Telecom equipment will show a CAGR of 12.7% in the same period, compared to just 3.8% for the developed world.

All this is welcome news for the IT and telecoms sector - with the notable exception of those companies not well established in emerging economies. If prospects for the mature economies continue to darken, those businesses may be getting a touch damp in the months ahead.