NBN Sensitivity Analysis: Cost Benefit Part II

I reworked the figures (spreadsheet) in my costs benefit analysis spreadsheet with new assumptions. Four new scenarios show impact of changing assumptions. From low to high takeup adds $10 billion to NPV. But from low to high GDP impact adds $30 billion to NPV. More than 1% growth in GDP then NBN is a no brainer. Less than 0.5% then NBN is too expensive for the benefit it provides. Takeup has much less impact than GDP effect.

See spreadsheet here. Originally posted on Whirlpool NBN forum. Original Cost Benefit Analysis: July 2010 | April 2009.

Assumptions:
1a.Takeup high: Business 90%, Consumer 70%
1b.Takeup low: Business 65%, Consumer 50%
2a.GDP high: 1% impact (to year 15, pro rata to % built)
2b.GDP low: 0.5% impact

Scenarios:
1.High takeup, High GDP: NPV $10 billion
2.Low takeup, High GDP: NPV $nil
3.High takeup, Low GDP: NPV negative $21 billion
4.Low takeup, Low GDP: NPV negative $32 billion

With low takeup but high GDP impact, the NPV of the NBN is around $zero. Therefore, the NBN is positive, when business takeup exceeds 65%, AND consumer takeup exceeds 50% and GDP impact is 1% (per annum pro rata to year 15 from build start).

With high takeup, and 1% GDP growth (high GDP impact), NPV is positive $10.66 billion.

With low takeup (business 65%, consumer 50%) and 0.5% growth (low GDP impact), NPV is negative $32.5 billion.

If GDP growth only reaches 0.5% per annum (to year 15) from NBN, then NPV is negative $21 billion. This is with high takeup (business 90%, consumer 70%).

Therefore impact on GDP has the greater impact on NPV of NBN. From low to high takeup adds $10 billion to NPV. But from low to high GDP impact adds $30 billion to NPV. Sounds like we need to be arguing about how much impact the NBN will have on GDP. More than 1% growth in GDP then NBN is a no brainer. Less than 0.5% then NBN is too expensive for the benefit it provides. Takeup has much less impact than GDP effect.

Research on broadband impact on GDP.

1. Access Economics in their recent report for IBM, suggest 1.5% increase in GDP "within a few years" (p.37) for Transport, E-Health, Water, Electricity

However this is for FTTN (for $10-20 billion investment). Access Economics, The Economic Benefits of Intelligent Technologies, May 2009. Would be interesting to try to back out the costs. Though I don't think the 1.5% includes the cost of the network (p.ii), but depending on the degree of spare capacity in the economy (??jobs impact of building network??).



2. The World Bank considers there is a expectation of 1.2% increase in GDP for every 10% increase in broadband (Qiang 2009 pdf). This cites an earlier Qiang working paper of 2008. See picture above from Qiang 2009.

Australia in contrast has much high speed broadband. But many Australians do not use broadband. The ABS 8153.0 (June 2010) cites 9.6M internet services (3.2M over 8mbps; 8.2M over 500kbps). Of these 9.6M, 4.2M are DSL, 3.45M are wireless 0.8M dialup. Therefore there are at least 1.3M with dialup or slow broadband (less than 500kbps). These numbers relate to accounts rather than persons, so in our house one connection is used by me and my wife. Other houses may share a single connection with a family of five. Work and home connections might count twice. Still with 9M households and 2M businesses, there is still some scope for probably another 20% penetration of broadband from nothing, let alone those households with no computer. Malcolm Turnbull cited this week only 43% of homes with income $40,000 or less have internet.

Overall we have 9M households and 7.0M household broadband connections. But with only 4.3M DSL connections, there must be at least 2.7M wireless broadband connections, maybe iPhones and other 3G phones. At least 2M households don't have wireline broadband. Possibly as many as 4M households. Thus there is plenty of scope on the World Bank numbers for GDP growth in excess of 1%. However, the Cost benefit model needs a 1% GDP rise (about $7B per year) to run for about 8 years (from the end of the NBN build until the model ends at year 15).

The community needs to have a conversation about whether we think 1% growth in GDP is viable under the NBN. The NBN if spent in one year is about 3.5% of GDP. A 1% return increasing GDP is then around 30% return on investment. In these terms, the return seems quite high. Yet I am optimistic. Your comments are as always appreciated.

Value Management for Government

The Victorian Election is due on 27 November, and I just examined the Victoria Innovation policy (DIIRD). The focus is on businesses and innovation capability, roadmapping and foresighting (p.26), and establishing a new peak Innovation Advisory Forum (VIC DIIRD 2009-12 Corporate Plan). Innovation goals are about increasing innovation capability, such as increasing R&D to 29.3% of Australia's R&D (p.27). Focus is on the big job sectors: Auto, Aviation, Biotech, Energy, Financial Services, ICT, International Education, Tourism.

Victoria has admirable Innovation goals: to be Australia's leading economy - innovative, dynamic and sustainable (DIIRD 2010 Annual Report, p.12), and specific goals including:
150,000 new jobs by 2010, $8 billion infrastructure by 2011, and $35 billion exports by 2015. (All good measureable, actionable, simple, achievable goals).

Value Management suggests a greater focus on consumers and consumer value. My suggestion on the ALP Victoria website Get Involved is a voter facing portal for Victoria Government, myVic.

Title: myVictoria (myVic, myGovt) portal for Voters (an Innovation)

Tags: web 2.0, facebook, "social media", community, "building community", volunteering, "car pooling"

Many voters feel cut off from the Government and not listened to. We are separated often from our neighbours (See Softbank 30 year plan 10Mb pdf). Government is organised to suit their processes rather than voters' needs. Let's use the internet to make a better connection between voters and government.

Goal: every Victorian has a myVictoria webpage by 2013.
Estimated cost: $1 per Victorian operating costs, plus $0.50 per Victorian development.
Tagline: ALP: We Listen, We listen to Victoria

What does myVictoria do?
- share voter problems and likes, including strength (agree, strongly agree, disagree, strongly disagree)
- aggregate community concerns (a Victoria page shows all the problems and likes combined with number of voters, and strength rating on issue)
- share the good as well as the bad
- volunteering? Solve local problems. How can I help? Helping others in your local community (limited to 1-2km) by electoral roll
- car pooling. Get cars off our roads by finding nearby commuters who are going the same way.
- energising communities. Connecting Victoria.
- local problems, local solutions. Cutting costs. For instance, local volunteers to pick up rubbish off the street or beach. Local give advice to where problem can be directed in Government.
- reputation system, tracks volunteering, tracks politician performance (happy, not happy) for MPs, Premier, Govt Departments, Issues
- privacy. Only locals can see your (identified) issues, problems. Within 1-2km. Government and everybody can see aggregate issues (de-identified), by councillor, by electorate, by region, across State.
- donate. Benficiaries of volunteer work can donate to myVic website offsetting costs.

STEPS
- Pilot project with 1000 homes, plus 1000 volunteers (groups of ten in community, over 100 communities). Find functions communities want to use. Test and estimate costs.
- Expand to include more communities. Roll out in line with NBN.
- Can expand to include local and national government. Cost sharing across three levels of government reduce costs.
- Can expand to school children (babyVic).

Benefits:
Labor is the party of Innovation. Labor: we listen. Labor: building communities. Like Facebook for Victoria (based on location you live and connecting with local community). Trending issues. Live real time ongoing feedback from voters. Not just at election. Not just a sample. Everyone has a voice. Cutting costs. Getting volunteer work recognised and organised. Intersects with NBN benefits, and focuses on enabling everyone to participate.

Fairly low cost at $1 per voter per year. Offset by across government contribution. Offset by donations from volunteering.

Risks:
World first, so may be privacy, regulatory and transparency issues. Cost a risk, but offset by pilot. Reputation at risk since project government sponsored. Technology risk if system goes offline.

What's important (and brief) in a (consumer) value model of innovation?

I express my PhD contribution (to the innovation and consumer value literature) as a list of propositions:

Proposition 1. Value drives consumer action. Consumers adopt new technology when they see good value.

Proposition 1a. Loss of value is a stronger drive to action (problem solving) than value.

Proposition 2. Value (when complex) has multiple, conflicting meanings.

Proposition 3. Consumers express value memories as attitude.

Proposition 3a. Attitude occurs at two value levels; by value meaning and overall.

Proposition 4. Closing and simplicity emerged as the most unusual and unexpected value practice and value meaning.

Proposition 5: Value is driven more by emotion than goals.
As Steve Jobs said "Don't let the noise of other's opinions drown out your own inner voice, heart and intuition. They somehow already know what you truly want to become." Stanford Commencement Address 2005.

My what's important thinking crystallises from the more longwinded post from a few days ago.

If the NBN is the solution, what is the problem?

I suggest three problems the NBN addresses:
1. High per Gb prices, compared to overseas
2. Capped Gb per month, compared to overseas
3. Price per month measured taking incomes and currency into account (ie affordability)


Also, I sent Minister of Broadband a note referring to my poster on the NBN

---

Senator Stephen Conroy,
Minister for Broadband, Communications and the Digital Economy
re: How to sell the sizzle of the NBN? .... to non technical Australians....

Dear Sir,

I recently produced this poster for the Melb Uni, IBES (Institute for a Broadband enabled Society) on how to portray the benefits of the NBN in a way that, I believe, is more appropriate (and more oriented) to consumers. The focus of NBN discussion on $43 billion and headline speed (100Mbps, 1Gbps) are all well and good for techies and IT professionals, but don't speak to the needs of more ordinary Australians, such as retirees who use broadband mainly for email, working mothers who manage a household budget, and other non-technical people. The NBN also needs to be sold to (well informed) non-technical people, but with language more in keeping with their interests and concerns. The poster provides a sample of three ordinary Australian and how the NBN will be better value for them.

Headline:
NBN: faster, simpler, cheaper broadband.
Get more…. Do more… on the NBN.

Poster Summary
Why do consumers adopt new technology? What holds them back? How much will they pay? Past innovation theory focuses on early and later adopters, the young and high income earners (Rogers 2003). Value theory suggests consumer goals drive consumer choices (Woodruff 1997). Co-construction of value (Vargo and Lusch 2008) is a new perspective suggesting consumer value drives successful innovation (Kim and Mauborgne 2005). Innovation succeeds when it creates consumer and shareholder value. Innovation fails when it fails to create value.

Conclusion
To sell the sizzle of the NBN, we need to talk about how the NBN creates value for consumers. The focus should become how the NBN is cheaper ($ per GB), faster, and ideally simpler in pricing, choice, and usage. We should forget the $43 billion headline price, and 1 Gbps headline speed and talk in terms consumers understand: price per month.

Poster Image at: here(9Mb)

Blogpost on my PhD blog here.


I am researching how consumers understand value in a new technology, looking at 3G mobile phones.

The focus I recommend for the NBN (price per month) is difficult while the NBN is providing a wholesale only service, but focus could be made on the current Tasmanian NBN retail offerings, especially where they are priced lower than current ADSL2+ pricing. I have a blogpost on this comparison too, I call NBN ValueWatch here .

Kind regards
Richard Ferrers
Innovation and Value analyst
University of Qld

What's important: in a (consumer) value theory of innovation

A Phd needs an academic contribution. The 'so what' was that research all about. Why was that research worth doing?

This post reprioritises the (consumer) value model. The Value Model focuses on the consumer aspect of Innovation: what do consumers value in a new technology?



What's Important with consumer value:

1. Consumers intimately describe value (meanings and practices) in connection with their actions (buying without waiting; waiting). Consumers' problem solving actions protect their existing value, while value reconfiguring (buying, exploring, comparing) seeks to grow new value. Consumers express their emotional response to value far more than any goals they might have, which are almost completely absent in descriptions of their experience.

2. Loss of value is a stronger drive to action (problem solving) than value.

3. Value actions include value practices: individual - exploring; comparing; filtering/closing; social - observing; inquiring; recommending; value consequences - buying; using; waiting.

4. Loss of Value actions (problem solving) include: seeking seller (innovator, telco) assistance; seeking alternatives; closing; doing nothing.

5. Pre purchase Value meanings include: connecting; bargain hunting; novelty; power, beauty, duty. Post purchase Value meanings include: service, reliability, simplicity. Underlying Value meanings include: function, need, emotion and time.

6. Consumers express Value memories as attitude; "brilliant", "fabulous", "amazed", "fantastic"; "happy", "better", "good", "prefer"; "problems", "don't want", "annoy", "dislike"; "total crap", "pissed off", "shits me", "totally unsatisfied". Attitude is positive or negative, strong or weak. Attitudes attach to (value meanings in and overall to) a value object. Simple valuing, where one thing is better than another in all aspects, is rational. Where one thing is compared to another thing; the first better in some ways, the second better in other ways, then valuing is complex.

7. Value meanings (and their creation) interact with and reconstruct Value practices (collecting and sorting value information). The interaction makes value dynamic, constructionist, complex (multi-meanings) and paradoxical (different meanings pull us to different actions).

8. Valuing takes place as a series of value conversations: social, individual and telco (innovator, promoter, contextual), so value is socially constructed and experiential.

9. Valuing continues pre and post purchase, so value is iterative and dynamic. I call this the Value phases.

Limits:
The Value Model is based on interviews of consumers about their 3G mobile phones. I asked consumers:
-how did you come to have your 3G mobile phone? how do you find it now you have got it?
-is there anything you would change? how do you find the telco?
-what does your 3G mobile phone mean to you?
The grounded theory methodology assumes a world in constant motion, where consumers' actions are based on the meanings they make out of their experiences in the world. This type of research is called interpretive, as I interpret the meanings consumers make, and as such is not generalisable in the way statistical research is.

The Value Model is complex but close to and grounded in consumer experience with 3G mobile phones.

Comparing:
The Value Model has been compared to the major innovation literature theories of technology adoption (diffusion of innovation) and major consumer value literature (see below)

Updated NBN Pricing: iiNet breaks $1/Gb barrier

Value Watch (Sept 2010)

Headline: iiNet, in new pricing, breaks the $1 per Gb barrier on $60 plan and above... iiNet substantially lowers its NBN pricing with September price release, and until June 2011, provides speed at fastest rate. iiNet leads lowest NBN pricing, below Exetel's $2/Gb pricing towards $0.20 per Gb ($110/mth), and $0.60 per Gb ($60 /
mth).

See Value Watch here.

The Overview Model: towards a (consumer) value theory of innovation

An overview model, linking the grounded theory concepts into one overview construct. The Chapter 7 draft is available as pdf (9.5Mb; here). Innovation in this thesis is defined as "something new (novelty, a value meaning) which adds value" (consistent with Schumpeter 1934, Drucker 1999, 2007, Porter 1999, Vargo and Lusch 2008). To create value, innovators need to understand what value is to consumers and how value works (the processes and practices of value) for the benefit of consumers. Thus value is addressed always and only from the consumer perspective. All references to value are to consumer value, rather than shareholder value. The top diagram shows the value structure from simple beginnings.

Key aspects of (Consumer) Value:

• Value structure analysed through several dimensions: as three value conversations (individual, social and telco); three phases (pre purchase, post purchase, and consequences of value); and value interactions (between value meaning, value practices and context).
  
  
• Valuing continues pre and post purchase (iterative, dynamic).


• Value meanings, Value practices (12 each) interact and reconstruct one another (dynamic, constructionist, complex, paradoxical).


• Social, Individual and telco practices (socially constructed, experiential).


• Value stored as attitude (significantly emotional), so valuing largely not based on rational goals (Woodruff 1997) and decisions.


• Model is not generalisable, since interpretive (grounded theory; derived from consumer experience).


• Loss of value stronger driver to action than value (problem solving).


• Model is too complex but close to and grounded in consumer experience with 3G mobile phones. Need several layers to explain model.


• Model combines and compared to elements of innovation models; Bass (1969) individual, social practices, Bijker (1995) problem solving, Rogers (2003) linear adoption, Christensen (1997) adoption dynamics, Ryan and Gross (1943) knowledge intensive and social. Value Model built to examine, and analyse Kim and Mauborgne's (2005) Value Innovation; which hypothesises adoption when leap in value.


• Model value meanings tested against consumer value literature; fruit drinks (Zeithaml 1988), auto business to business (Flint, Woodruff and Gardial 2002), value typologies (Richins 1995, Holbrook 1996, Woodruff 1997)
  

This chapter has presented a value model of innovation, developed from the grounded theory practices in this thesis. The model is complex but offers a dynamic, subjective, contextual, and interpretive view of how consumers (at least in a 3G mobile phone context) understand value in a new technology. In the next chapter, I conclude and consider limitations, recommendations and further work to extend and improve the value model.

Comments welcome...!







Layer 1: Value structure:

Three value conversations (individual, social and telco)

Three value phases (pre purchase, post purchase, consequences of value)



Layer 2: Value Practices:

Pre: Post: Consequences:

Social: Individual: Telco:






Layer 3: Value Meanings:

Pre: Post: Underlying