Structural Remedies to Solve the Rural Broadband Issue

It would be an understatement to say that rural broadband policy in developed markets has largely been inadequate. The default program in many countries in Europe and elsewhere has been to hand in money to incumbent operators to subsidise NGA deployments in areas the incumbents themselves deemed unprofitable. The result has been a reinforced monopoly, a slightly better coverage in less dense areas of the country and in most instances no visible difference to actual rural areas. In many cases the subsidized deployments aren't even future proof because cutting costs in the short term was deemed preferable to financing robust infrastructure in the long term.

It has long been our belief at Diffraction Analysis that these subsidy plans were a very expensive way to not achieve the goals stated of universal or quasi universal coverage. Furthermore our intuition was that because of the lower profit expectations from infrastructure investors, a pure infrastructure approach to broadband coverage would be more effective. We hadn't fully done our homework however, so in the first few months of 2016 that is exactly what I and Thomas Langer spent our time on: economic modeling of vertically integrated future-proof broadband infrastructure versus wholesale only.

We publish the results today in a white paper entitled 'Structurally Independent Broadband Infrastructure Can Solve Perceived FTTH Coverage Issues'. In this paper we show that a wholesale model is inherently better suited to covering a broader part of the population with FTTH. More importantly perhaps, we also demonstrate that policy can much more easily de-risk a wholesale network operator without compromising competition than it can de-risk a vertically integrated operator. Our models show is that with an inherently better model and a lower risk, close to 100% national coverage with FTTH is achievable without public subsidies.

There is however a trade-off in order to achieve this much prized goal: not only must the structural model of the market be altered, but the regulatory model itself must be changed to better align with the expectations of long term infrastructure investors: moving away from inherently short term price regulation to longer term asset based regulatory models must be part and parcel of these changes.

This paper is available for free, and we at Diffraction Analysis are more than happy to discuss its methodology, results and implications, so feel free to reach out to us.