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The gap between the digital haves and have-nots is becoming more and more pronounced. Danny Mills and Kailong Liu look into why, and outline the role private capital can play in improving the situation.
The term Digital Divide was coined in the 1990s in reference to the binary distinction over whether people had access to cell phones or not. Since that time, the term has expanded to refer to the gap between demographics and regions that have access to modern information and communications technology and those that don’t. It can refer to global inequality between developed and developing regions, to urban and rural areas in a domestic sense, to educated and less educated individuals, and even to gender-based inequality.
COVID-19 reminded us all of the importance that high-speed, reliable internet connectivity plays in our everyday lives. Access to work opportunities, health care, education, socialization and many other daily requirements are increasingly digital, heightening the risk of inequality.
In 2021, the Deputy Secretary-General of the United Nations, Amina Mohammed, noted that “with almost half of the world’s population still offline, the Digital Divide risks becoming the “New Face of Inequality“. In the US, Microsoft1 estimated in 2020 that 157 million people, almost half of the population, do not have access to high-speed internet. The lack of access is also a tether on the economy with Deloitte estimating2 a 10% increase in broadband access in 2014 could have increased US jobs by 875,000 and economic output by USD 186 billion by 2019.
So what is being done to address this?
The issue was explicitly tackled in the bi-partisan Infrastructure and Jobs Act passed in November 2021. The Act includes funding of over USD 60 billion for broadband and other programs aimed at providing access to faster, more reliable, and more affordable internet connectivity – with a particular focus on rural and underserved communities.
As early as 2015, the European Union called on Member States to increase broadband deployment programs and established various facilities such as the Connected Europe Facility and the European Fund for Strategic Investments to assist with the funding of qualifying initiatives.
Since then, EU states have seen access rise across the board, from 16% in 2013 to over 70% in 2021 on average3. However, due to the differences in implementation, there is a large disparity between European countries when it comes to access to full fiber-to-the-home (FTTH), as some countries have focused on the upgrading and life extension of legacy technologies such as DSL and cable. Others have made the direct leap into fiber, which is now considered the only future proof technology. Early adopters such as Spain and Portugal or follower countries with an aggressive implementation strategy, such as France, enjoy coverage rates in excess of 75% with up-take rates of over 70%. On the other hand, the laggards are now catching up at different speeds. While Italy and the UK have recently been able to increase FTTH coverage to 56% and 42% respectively, ahead of the 39%, 24% and 21% seen in Austria, Germany and Belgium respectively, none of these countries have a take-up of more than 30%4.
The telecommunications sector has come into greater focus for infrastructure investors. However, much of the investment has been directed into less-in-need countries as attention has centered on economic returns only. Now, supportive government policies have improved project feasibility, while infrastructure investors have become more serious about including social and other sustainability measures into their investment decisions. There is increasing appetite to invest into areas with a more immediate need for digital inclusion. Private digital infrastructure investments have grown from less than USD 10 billion in 2016 to almost USD 200 billion in 20225, a 65% CAGR. USD 2 trillion is needed in five years to cut the global digital divide by half, according to the Boston Consulting Group.6
We have been investing in the digital infrastructure sector for the past decade in Australia, the US and Europe and in sub-sectors such as telecommunications towers, fiber optic networks and data centers. We also recently invested in a fiber optic network purpose built to reach rural communities in the state of Kentucky, a rural-focused FTTH network in France and a similar network with a focus on rural areas and smaller towns in Germany. Our investment in a French market leader in rural FTTH, Altitude Infrastructure, benefits from the government’s initiatives contributing EUR 6.5 billion towards the deployment in low density areas.
Aside from subsidies, the initiatives also create attractive conditions, such as open access requirements and an accelerated timeline for mandatory copper and DSL decommissioning. In Germany, the government’s funding scheme has enabled many smaller, regional-integrated broadband operators to benefit from subsidies to build out smaller scale networks in areas where a privately funded build-out is uneconomic. This has enabled investors, such as our portfolio company Northern Fiber Holding, to buy into established operating businesses with cash flow generation and to fund their expansion into adjacent underserved regions with private funding.
So, while technology inequality has become more severe than ever, the combination of public initiatives and private investors’ increasing social awareness, perhaps provides our best chance yet to bridge the Digital Divide?