Broadband essential for delivering future growth

Doctors use broadband to send x-ray images for specialist assessment. Herald picture / Martin Sykes

The axe is poised to fall on Telecom. After the company announced on Thursday that it had missed high-speed internet customer targets, regulation that will break up its broadband monopoly is looking increasingly likely.

Communications Minister David Cunliffe says a regulatory review should be completed by the middle of the year, and he has strongly signalled that the status quo is not an option.

That's because broadband, a fancy term for fast internet, is no longer a topic for geek magazines or newspapers' tech pages - it's gone mainstream.

Cunliffe's post-election promotion to Cabinet and added post as Associate Minister of Economic Development seem proof enough of its new importance to the broad economy.

Broadband is a technology whose wider economic and social benefits are just starting to be understood in countries far ahead of ours in adopting it. It's transforming and enabling business in previously unimagined ways.

It's also a technology that New Zealand is well behind in picking up, which means that few of those benefits are being realised here.

Not only are we behind, Cunliffe says, we're in very real danger of getting left behind.

But why is broadband so important?

Tim Jones has been selling cherries out of the tiny central Otago town of Cromwell since 1984. Back then his company was known as Molyneux but, about seven years ago, Jones started selling fruit through mail-order catalogues and changed the name to the more descriptive, Orchard Fresh.

Now, the company is blazing new trails - for the past three years, it has been selling goods direct on its website, www.orchardfresh.co.nz. The company started with fruit, but added wine as central Otago gained cachet for its vintages.

About 15 per cent of Orchard Fresh's sales are made online, Jones says, which translates into almost four tonnes of cherries alone shipped to customers directly.

While the online portion is small, it is growing rapidly, he says.

"It's something we're really keen to build on. It's the way of the future."

Jones says adopting broadband has allowed him to cut significant costs out of the business, in office paperwork, shipping and marketing. By cutting out middlemen distributors, Orchard Fresh saves about 35c a kilogram in shipping and 10 per cent on the sales price of goods. Those savings are passed on to consumers, who thus get their fruit cheaper than in grocery stores, he says.

And for Orchard Fresh, broadband is synonymous with the internet. Dial-up access just doesn't cut it: "To get the true benefit of the internet, you need broadband."

Orchard Fresh's story is anecdotal, but it is indicative of broadband's effects on a wider level. While conclusive studies around the world are only just beginning, preliminary evidence is pointing towards the transformative and enabling powers of high-speed internet.

The OECD's directorate for science, technology and industry is studying broadband's economic effects and has come to three early conclusions:

* Broadband infrastructure investment positively affects economic activity because it "contributes to aggregate investment" as other kinds of information networks and technologies tend to get upgraded at the same time.

* Broadband-enabled content and services - with the video-on-demand offerings springing up in many countries as but one example - will be a key driver of economic growth.

* As in the case of Orchard Fresh, broadband helps businesses lower transaction costs and find efficiency gains.

While firm job numbers or gross domestic product effects are difficult to pin down, the OECD is considering a number of reports from several countries, including:

* A Swedish study of businesses shows that those with an internet connection faster than 2 megabits per second had productivity that was 4 per cent higher than those with slower speeds.

* A Danish report shows that e-business-oriented firms had 10 per cent higher productivity than companies with simple technology use.

* A US report suggests that an investment of US$270 billion ($390 billion) for a country-wide broadband network would create a total of 1.2 million jobs, directly and indirectly.

* Investment in overall information and communications technology (ICT), which includes broadband, has contributed "substantially" to GDP growth in the United States, Canada, Netherlands and Australia.

New Zealand has yet to conduct any studies on broadband's effects, although the Ministry of Economic Development says it is planning to do so this year.

In Australia, a study commissioned by cellphone-maker and infrastructure builder Ericsson suggests immense potential benefits from broadband investment.

Ericsson - which admittedly has an interest in supplying broadband equipment - says an investment of A$850 million ($927 million) over four years for construction of a network in Queensland would result in 15,000 new jobs over 15 years.

Queensland would also see an increase in gross state output of A$854 million a year after 2018.

While the reasons for New Zealand falling below the OECD average in GDP per capita are many, economists say these emerging analyses are pointing out some correlations with broadband investment.

The International Telecommunications Union ranks New Zealand 41st out of 42 high-income countries in telecommunications infrastructure investment, with only Kuwait ranking lower. New Zealand also falls below the OECD average, which rates 30 countries.

That underinvestment is a key factor holding the country's GDP back, says ASB Bank chief economist Anthony Byett.

Since labour has been so cheap, companies have underinvested in ICT - but the productivity pains are now starting to show, he says.

"It's been a lot easier to go out and hire someone than it has been to sit down and think where do I really want to take my business to, and what investment do I need to do that.

"That's where we've got to now, we haven't got much choice.

"As an economy, we've pretty much stretched out our labour force. As a source of growth, putting more people to work isn't going to be the main source."

But John Small, a consulting economist at analysis firm Covec and former economics chairman at the University of Auckland, says broadband is too expensive for many small and medium-sized companies.

These firms can't afford to base their businesses around it, so they plan around it and thus don't realise its benefits.

In 2003, Telecom convinced the Government to opt for a wholesale scheme instead, which, says Small, was the wrong move.

Cunliffe said after Telecom's results on Thursday that he would conclude a regulatory review by the middle of the year, and that "another gear" was needed to stimulate broadband uptake.

The axe does indeed seem poised to fall.

* * *

BETTER, FASTER LIVING JUST A FEW CLICKS AWAY

* Healthcare: People living in rural areas will be able to visit their general practitioners and have results, such as x-rays, instantly sent to specialists in main centres. Medical treatment will be much cheaper and faster.

* Telecommuting: More people will work from home, cutting costs for businesses, easing traffic congestion and improving environmental issues.

* Commerce: Buying goods and services on the internet will lead to lower costs for business and consumers, and time savings for shoppers.

* Entertainment: When music and video is delivered over the internet consumers will be able to choose what they want to see and hear, and when.

* Exports: New Zealand businesses will see their international markets open up, and will sell more goods and services over the internet.

* Community: As community institutions in rural areas ebb away to big business, broadband will allow for new online communities.

* Research: New Zealand will be able to take part in research projects that it was previously excluded from.

* Education: Students will be able to connect with counterparts around the world and learn about different cultures firsthand.