Let’s start comments on the NZ Institute Broadband report with the top chunk of the slide on Telepresence, which is page 7. It is the first page that shows how the topline number of $2.7-$4.4 billion in economic benefits is built up. I believe the $95m in annual cost savings is far too high.
NZ Institute uses, in true consulting style, driver trees to calculate and show the benefits. I’m a fan of this method as it is a great way to identify the ‘drivers of value’, or the bits of a business or sector that create and cost the big dollars.
This is the top half of the telepresence driver tree.
It shows that there are $95m in potential savings from an increase in the use of telepresence due to higher broadband uptake.
The top branch of this tree shows $180m in savings from reduced business trips, from a total business travel spend of $250m domestic + $650m international = $900m.
The bottom branch shows $85m in costs, which if you read the notes on the right breaks into $37m each year of purchasing telepresence systems, and $48m of losses to NZ of less business trips.
I beleive that the $48m is too low, the 20% savings on the $900m is too high, the cost of telepresence systems is too high and the overall cost savings benefit is too high.
A huge amount of the $900m travel costs is revenue for New Zealand companies, such as Air New Zealand, hotels and restaurants, and reducing this cost will have a lessor impact on the economy. Moreover, reducing business travel may have a serious effect on the economics of the number of flights to and within New Zealand, which would mean increased fares for the rest of us.
Let’s try another way of working out the benefits.
$250m of the travel spend of $900m is domestic, and savings on that number is largely moving money between sectors of the NZ economy. However a lot of the $250m is paying for fuel for planes (and other internationally sourced costs like plane leasing), which is a net loss to the economy that can be saved. So let’s say 40% of the domestic cost is air and car travel x 60% of the air/car travel cost is fuel = 24% of the overall domestic costs that are savable. That’s $60m available to be saved domestically.
Meanwhile $650m of costs are international, but let’s say 35% of that is AirNZ revenue, which leaves $423m of net economic benefit to be saved from international travel, and $483m in domestic and international savings.
Now some of the travel costs (an unknown portion) are “lost productivity estimate”. Again I’d push back, as anyone knows who travels on business, the amount of work you do increases rather than decreases. When you travel on business you are not constrained to 8 hour days, but pretty much have all day available to work, even if you waste some time in long security queues. So let’s say the productivity loss is zero, and take, say, $83m* away from the $483m estimate to leave $400m that is savable.
*Wild guess, like a lot of my assumptions.
Now, overall the report estimates a 20% reduction in the number of trips, which would be 20% of $400m = $80m.
However, we Kiwis are already minimising our international travel, simply because those overseas trips are so long and expensive. We can’t get rid of many of those expensive international business trips, as forming relationships is something best done face to face. It’s also often seen as a perk of the job, and so staff will push back hard on losing their ‘yearly trip’. So I would push hard on the 20% reduction in frequency of travel figure, and go lower. Let’s take 10%,which would make $400m x 10% = $40m saving in total.
Compare this $40m with the NZInstitute’s $180m gross productivity benefits less the $48m losses to NZ = $132m in net productivity benefits before setup costs.
Those setup costs are annualised at $37m, and that is money that will mainly go to products made and sold by companies from outside NZ. However, a good chunk will go to NZ vendors and installers – and those local margins can be good. Let’s say $10m of the $37m goes to the NZ economy.
But wait – there’s more.
The cost of telepresence systems is dropping to close to zero. It’s free on my mac, and will be even better when Leopard is released. Windows PC’s are slowly coming with cameras built in, and the IM and Skype clients are increasingly easy to use with video.
My parents, for goodness sake, are already using Skype video to talk to their children and grandchildren. It helps that they have TelstraClear’s Wellington service of course, and that their ‘counterparties’ are offshore.
So the future (and the present) is video conferencing from PC to PC, from desk to desk. Most will just come for free, and emerge as we upgrade our PC’s and chat software. At the top end of the masrket there are companies that will help this along. Communique Conferencing (which a friend of mine helped start) will, for example, provide cheap audio conferencing for huge events, and web, powerpoint and video conferencing over your PC, in a meeting room or or in 9000 public conference rooms around the world.
So that’s all to say I’d knock a good chunk out of the $37m estimated costs for telepresence systems – let’s say to $20m with $8m (installing screens etc) coming from NZ economy. That leaves $12m in net economic costs, and let’s agree not to discuss the distribution of spend over the next 5 years.
So. We now have $40m in annual cost savings benefits and $12m in increased costs, which is $28m economic benefit per year.
Let’s apply the last test – How does that number feel?
Not so good. I can see three issues.
The first is that the teleconferences and simple telephone calls are very good substitutes for travel in almost all cases. Many huge business are run very effectively on teleconferences, backed up by occasional face to face meetings, and so travel costs are already ‘reduced’.
The second is that the major effect of ubiquitous video will be the migration of teleconferences to video conferences, rather than the migration of travel to video conferences. This means increased overall costs of communications as video costs much more than audio, if the telcos have anything to do with it.
Finally the migration of travel to video for sales seems a big reach. Video (and phone) calls are not substitutes for a quiet beer or coffee, or a door-knocking get-to-know-you visit. Sales people will still need to meet people face to face in order to build the relationship that they can continue later via the phone and video calls. So even with video Kiwi businesses would be wise to ensure that they meet face to face their better overseas clients at least once per year.
Overall to me the benefits of costs savings are over-stated, and the setup costs are over stated. When it comes down to it I’d just prune this top branch and assign a zero value.