Executive Summary
1. The UK broadband market is developing rapidly. Various suppliers are now offering or trialling 'Next Generation Broadband' ( NGB) services considerably above 2Mbit/s. A service of up to 22Mbit/s has recently been launched at £30 per month by one operator in parts of Edinburgh and Glasgow, and one of the largest players has mooted the possibility of 50Mbit/s services by 2007.
2. As the NGB market develops, the Scottish Executive is concerned both to optimise the social and economic benefits of broadband for Scotland, and to avoid the emergence of an unacceptable new digital divide. SQW was commissioned to undertake a study to: assess the economic impact of broadband for Scotland; appraise the incremental benefits (social and economic) of NGB services and applications; forecast the likely future evolution of NGB coverage and take-up, in the absence of intervention; analyse whether there is a case for public sector intervention in the NGB market; and identify the optimum policy option(s) for the Scottish Executive to adopt.
Coverage and take-up
3. We have developed a definition of the various generations of broadband services using successive orders of magnitude of peak downstream bandwidth, with first generation broadband ("1B") being 10 times faster than dial-up internet access, second generation ("2B") being 100 times faster, and third generation ("3B") being 1,000 times faster.
4. The availability of 1B services in Scotland is now approaching 100% - making Scotland one of the most extensive broadband markets in the world. However, our study confirms that a new 'broadband divide' has already started to open up between urban and rural areas, in terms of the availability of 2B services (at least 5Mbit/s). Our expectation is that there will remain a significant proportion of Scotland's population (c. 26%) who will remain unable to access such services in the foreseeable future due to line lengths.
5. Furthermore, there is the prospect of a much more persistent divide emerging in 3B+ services (50Mbit/s +) from 2007 onwards. We anticipate that such services will start to become available through cable and VDSL2 platforms in urban areas. However, whereas the roll-out of 1B and 2B services in rural areas require upgrades in core transmission, backhaul capacity and exchange equipment (but uses the existing copper access infrastructure), the bandwidths associated with 3B+ services go beyond the capabilities of the legacy BT copper access infrastructure and necessitate the extension of fibre deep into the access network - to the cabinet, if not the home. There would be major costs associated with such a roll-out, and - in areas with no infrastructure level competition - relatively little incentive for BT or anyone else to risk such an investment, given that 3B+ services would be competing with 1B and 2B services in these areas. Approximately 44% of Scotland's population will remain unable to access 3B+ services in 2015.
6. Nevertheless, take-up of broadband by consumers and businesses continues to grow rapidly. We estimate that c. 0.8 million broadband connections were in use in Scotland at the end of 2005, and that the total will rise to c. 1.8 million by 2015. By 2010, we anticipate that c. 36% of broadband connections will be at 1B bandwidths, 54% will be 2B, and 10% will be 3B+.
Economic and social impact
7. There is a growing body of evidence in the economic literature that Information and Communication Technology ( ICT) - and the organisational and process innovations which it enables - has very significant positive impacts on productivity and economic output. Given that ICT investments being made by businesses are increasingly reliant on sites having broadband connectivity, we estimate that something in the order of a third to half of the productivity benefits associated with ICT-related innovation in the period 2001-2015 would not be realised if affordable broadband were not available.
8. Our model indicates that the annual Gross Value Added ( GVA) of Scotland's market sector in 2015 will be in the order of £2 billion to £6 billion higher due to business take-up of broadband than it would have been otherwise (at 2000 prices). Our central projection is that annual GVA of Scotland's market sector will be c. £3.4 billion higher in 2015 than it would have been otherwise (approximately 5% of annual market sector GVA).
9. Much of the economic benefit (45%) is expected to accrue to the J&K SIC grouping (financial services; real estate, renting and business activities). These are the industries that have adopted broadband most rapidly, and the sectors in which ICT has a disproportionately large effect, given the nature of their operations.
10. The bulk of the overall impact (77% in 2015) derives from the incremental benefits of 1B bandwidths vs dial-up. This is due to three factors: the roll-out and take-up of 2B and 3B+ broadband happens later than that of 1B; the incremental productivity benefits of 2B vs 1B and of 3B+ vs 2B are each assumed to be lower than the incremental benefits of 1B vs dial-up; and we have assumed a lag of four to six years before businesses upgrading to these bandwidths realise the full incremental productivity benefits associated with that upgrade.
11. In this context, the Scottish Executive's Broadband for Scotland intervention - to accelerate the roll-out of 1B services in Scotland - has had an important impact. We estimate that the 70% coverage point was brought forward by three months, 90% coverage by 17 months, and near-100% coverage by four years. Our model suggests that the economic impact of this intervention will peak in the year 2008, with the annual market sector GVA being approximately £150 million higher in that year than it would have been in the absence of intervention.
12. As well as bringing economic benefits, the availability and take-up of broadband has important social impacts. The advent of 2B and 3B+ services will facilitate new forms of video-related consumer entertainment - some of which will be in direct competition with services delivered via other platforms. There is evidence that first generation broadband has accelerated the growth in teleworking, and we anticipate that the increased bandwidths associated with 2B and 3B+ broadband can only serve to make teleworking still more attractive; despite this, we are sceptical that the availability of broadband will, on balance, lead to any appreciable reduction in traffic levels and congestion.
13. In Scotland's health and education services, broadband is already bringing significant benefits. We foresee that these services could well have a much higher reliance on video-based (and large image file) applications than will be the case for a typical business. We therefore expect the higher bandwidths associated with affordable 2B and 3B+ services to bring substantial incremental benefits to the health and education sectors in Scotland - where they are available.
Policy implications
14. Analysing the case for further public sector intervention in Scotland's broadband market, we find that there remains an important market failure in the extent to which businesses are exploiting their broadband connectivity, and there is a further potential market failure in respect of unidentified clusters of underserved demand.
15. Notwithstanding our projection of a new 'broadband divide' between urban and rural areas in the availability of 2B and 3B+ services, it is not possible yet to say with absolute certainty which areas will remain persistently underserved by the market. Furthermore, it is too early to judge whether the future lack of 2B and 3B+ services in certain areas will represent an unacceptable inequity, given the availability of substitute entertainment services over other platforms, and the possibility of multiple (bonded) 1B lines being used by businesses.
16. Our recommended overall approach, therefore, is to refrain from major intervention in the 2B and 3B+ markets at this stage, but to minimise avoidable barriers to network investment and ensure that Scottish businesses are well informed regarding the opportunities presented by broadband-enabled ICT. The first step, however, is to ensure that ICT as a whole is given sufficient weight, at a policy-making level, as a driver of productivity growth in Scotland.
17. Our specific recommendations are as follows:
- Recommendation 1: Radically increase the profile of ICT within Scottish productivity policy (including the development of an overall ICT policy for Scotland, and the updating of the broadband strategy)
- Recommendation 2: Ensure that existing publicly-funded ICT support is '2B ready'
- Recommendation 3: Exploit the broadband-enabled web as a channel for stimulating ICT-related innovation by Scottish businesses
- Recommendation 4: Develop mechanisms for identifying and aggregating under-served demand for broadband
- Recommendation 5: Minimise avoidable barriers to private sector investment in 2B/3B+ networks
- Recommendation 6: Avoid market-distorting interventions in the 2B/3B+ markets
- Recommendation 7: Ensure that Scotland's planning system takes competitive broadband availability into account
- Recommendation 8: On completion of the 'Pathfinder' procurements, determine the optimum scale and scope for future public sector broadband demand aggregation initiatives