Date created: 28 November 1996

Last modified: 18 November 1997

Maintained by: John Quiggin

Pay TV's wasted billions

The NIMBY (not in my backyard) syndrome has often been accused of being a major obstacle to development and economic growth. Yet it is surprising how often projects opposed on the basis of their effects on the environment or local amenity are also economically disastrous. The 'crash-through' approach that overrides local concerns is also inimical to good economic planning. The most famous example in Australia has been the Franklin Dam project, an economic as well as an environmental nightmare.

The recent court decision restricting the capacity of Optus to override local planning procedures in the rollout of its cable network is another example where NIMBY concerns may help to prevent an economic disaster. The current race between Telstra and Optus to provide duplicate pay-TV services represents both a waste of billions of dollars and the loss of our best chance to achieve full participation in the growing worldwide broadband digital network (the so-called 'information superhighway').

Local telecommunications networks are natural monopolies. That is, although the standard phone service may face competition from analog or digital mobile telephony and for that matter from postal services, costs are minimised by having only one local phone service. Economists have long debated how to best manage such natural monopolies. Public ownership, franchising, common carrier approaches and regulated private monopoly all have their adherents. The one point that has gained almost universal agreement is that duplication of the network is the least socially desirable outcome. Thanks to the continuing pay-TV fiasco, this is precisely the outcome that Australia is set to achieve.

Telstra and Optus are busy spending billions of dollars producing duplicate cable networks. The race to pass more homes more quickly is undoubtedly leading to increased costs for both parties. The result is that consumers of phone and pay-TV services will pay at least twice as much for the network as they would have paid for a single network. Because Telstra and Optus can pass costs onto all phone users, we will all pay regardless of whether or not we choose to take up pay-TV.

Not only will the service be twice as expensive, it will be technically obsolete. Both networks are analog systems based on the hybrid fibre-coaxial (HFC) approach, , in which optical fibre links a network of nodes serving groups of up to 2000 homes with coaxial cables. This is fine for the provision of analog pay-TV services. But the future of communications, and most notably the rapidly developing Internet, lies in digital networks based on optical fibre. It would undoubtedly be too expensive to supply optical fibre to individual homes at present. But the more progressive telecommunications companies in the United States are already discarding HFC in favor of building optical fibre 'up to the curb', with each home being connected to the fibre network by standard twisted pair wiring. The resources being wasted in providing duplicate analog networks could have made Australia a world leader in the development of digital telecommunications networks.

Advocates of the HFC approach argue that its current cost advantage can be stretched a decade or two into the future. Even if this viewpoint is accepted, it is clear that the race to provide duplicate systems is leading to a technically inferior HFC service. Optus in particular is being driven to adopt a 'quick-and-dirty' solution. Apart from pushing costs onto local communities by exploiting their exemption from planning laws, the Optus overhead cabling system is more exposed to interference and has fewer amplifiers and larger service areas than Telstra's underground system.

Exactly the same story is being played out with digital mobile phone services. The analog network was set up on a common carrier basis, with the rival companies selling services separately but using the same network. But for mobile digital services, the rival companies provide duplicate, or rather triplicate, networks. One result has been greatly increased costs being imposed on the community as the networks exploit the powers of expropriation granted to them by government to set up towers wherever they please. Another has been the failure of the digital networks as a group to make significant inroads into the market dominance of the technically inferior, but unitary and well-established, analog service.

The Communications Minister, Mr. Lee responds to concerns about duplication with the fatuous suggestion that it is a commercial decision, similar to a decision by Coles and Woolworths to open stores in the same town. There are so many holes in this analogy that it is difficult to know where to begin. First, retail services have no natural monopoly characteristics. The telecommunications fiasco is more analogous to the construction of a complete new shopping mall next to an existing mall with dozens of empty shops. Second, Coles and Woolworths are not in a position to pass on the costs of bad decisions to their existing customers in other areas. Third, neither Coles not Woolworths is publicly owned. Finally, retailers are not considered sufficiently vital to be exempted from planning policies or given powers of compulsory acquisition.

The court decision removing the Optus exemption from planning regulations has given the government a last chance to prevent the waste of billions of dollars, money that will come out of the pockets of taxpayers and consumers. Almost any policy alternative, from a common carrier approach to a return to public monopoly, would be an improvement on the present mess.

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