Learning from the credit crunch to avoid a broadband crunch

While it might be the most pressing issue de jour, the financial system isn’t the only area where government needs to inject a bit of liquidity to get a market moving. The way in which broadband services are supplied could also do with a little central intervention to keep the bits flowing.

Surprisingly, there are some parallels to be drawn between the systems of finance and “bit trafficking”. Financial systems (banks in particular) have in the past operated on a system of fractional reserve banking where the total amounts loaned out at any moment in time are greater than the assets held in reserve – hence the term. The Basel II rules were conceived to try to offset this, by aiming to ensure that banks have sufficient liquidity and assets, but as these include property investments and more complex financial instruments that the banks themselves put a value to, there is some leeway and also some variation in the implementation of Basel II by different regulators. The system works (generally) because the loans are not usually all defaulted on at once, and those providing assets – depositors or central banks - do not want all their assets back at once.

When the loans are to other similar “local” or known folk to the depositors (a mutual or building society model), this is pretty manageable, as the systems are discrete, separate and resilient. There is also some external regulation to make sure everything is done fairly and in a supportable manner. When it goes global, involves different financial regimes, cultures and is highly connected - well you can see why sub-prime loans and bank runs disturb this model somewhat.

In the world of network connectivity, discrete and proprietary systems are more manageable and the setting of benchmarks, service levels and quality controls, more straightforward. Fixed-line telephony, private circuits and so on give plenty of control, but are more expensive and limiting especially for delivering high-end capacity or performance as demand grows and costs come under competitive pressures. So let’s build a combined network infrastructure, base it on open standards and global connectivity – welcome to the internet.

Just like the fractional reserve banking system tiered through countries’ central banks to major banks and down through other smaller lenders, this network operates on a fractional reserve bit capacity. At the customer end, internet service providers offer unlimited all-you-can-eat connectivity or flat rate tariffs (loans – “I promise to deliver this byte”) over a more fixed set of infrastructure (assets – not from depositors but backbone provision) with the plan (or hope) that there will not be a run on their bits (to much demand) or a drop in their assets (backhaul cost or constraints).

It is here the model breaks down, as although central banks are not government bodies, but operate as independent organisations, they are not tasked in the same way as commercial organisations – that is, to make money. The central bankers of the internet, typically incumbent telecoms companies, are. This puts a strain on the relationship between the demands of the customer and the interconnections between backhaul and service provision – the interbank lending of bits – leading eventually in the absence of government intervention or better regulation – to a broadband crunch.

The solution? Well, like the financial crisis it would be better if we could avoid starting from here, but in the absence of a time machine, the best route forward would appear to be similar in both cases. An injection of liquidity to encourage investment and change the emphasis of the core financial models and service obligations, and greater independence of the “central bank” from the money making obligations of bit trafficking.

This would best be seen within the UK, where the major incumbent, BT, wants to move to a fibre-based infrastructure, but would be forced to open this up to its competitors for their own use. In commercial terms, BT sees this as not viable, and is therefore dragging its feet while UK plc watches other countries with more government-owned incumbents move to a high-speed backbone and fibre-to-the-premise system. Without central intervention, the UK stands to become a bit-speed backwater – but BT will continue to be profitable and to maintain its massive market share. If the government would intervene and create a shared risk/profit scheme for all players to participate in, then UK plc could be a world leader in high-speed internet services.

The problem is that current focus is not on such topics – the financial crisis is taking all the focus and more than its own fair share of the money. That it is a global crisis is neither here nor there – existing infrastructure projects in other countries continue on apace. Without a quick decision from central government, nothing will happen.

For further reading on the challenges facing internet service provision, read the Quocirca Superhighway at the crossroads report, freely available to download.

By Rob Bamforth, principal analyst, communication, collaboration and convergence