Tuesday, December 23, 2008

Strange Bed Fellows

It is fascinating to see how people line up in the whole NBN story.

Australia's last remaining old style socialist, Kenneth Davidson, wrote in The Age

If Telstra's fixed network monopoly had been maintained so that its economic rents had been retained instead of distributed to its competitors via arbitrage, the introduction of fibre to the node would probably now have been connected to up to 80 per cent of network customers.

Of course, Davidson's position is that the monopoly should have remained in public ownership. The main Telstra union, the CEPU, has been simultaneously engaged in an industrial dispute and in the defence of their employer's market power.

Perfectly logical really, as historically monopoly rents aren't returned to shareholders but dispersed across a whole coalition of supporters of the monopoly. However, when management repeatedly claim that the only reason the company exists is to create shareholder value, you might think the union would adopt a different strategy.

Back to Davidson. He is on the point that the cross subsidisation of access lines from call charges was how the network was built and that the recognition that the marginal cost of a call was close to zero resulted in "arbitrage dressed up as competition". Apart from the error i thinking that arbitrage is by definition "wrong" (it is after all what every retailer does), this creates the error of assuming that the network effect from new connections is infinite, and also ignores the signficant endowment effect.

While there are not many people connected to a network, creaing low price access and higher priced call charges is a good way to grow subscribers - as the benefit to other subscribers from the new connection is priced into the calls they will make. However, the more people that are already connected the less the marginal benefit to existing users.

In addition, an endowment effect operates. The price a consumer will pay to continue to rent a phone line is higher than the price they will pay to acquire one in the first place. Once the phone becomes something everyone has experienced there is no longer an economic case for the subsidy.

In any case the historical analysis is technically wrong. When the Federal PMG was created it charged users a flat rate for connection and did not charge for any calls made within the exchange area. The flat rate varied depending on the size of the exchange.

Davidson's conclusion is apparently simple;

Does Conroy seriously want to put the Commonwealth in danger of a multibillion-dollar compensation claim from Telstra shareholders when the alternative is to abort the tender or let it run its course and admit that there is no practical, economic alternative to letting Telstra continue upgrading the network? All the Government has to do then is change the regulatory structure to put adequate return on capital for new investment ahead of the present ersatz competition requirements and let Telstra get on with the job without cost to the taxpayer.

This is a strange calls for a private monopoly. Presumably despite the professed concern about the possible need for compensation, Davidson would follow-up with re-nationalisation.

Meanwhile Telstra has said pursuing legal action against the Rudd Government for kicking it out of the NBN tender is not a priority, though the telco has not ruled it out.

Nothing quite like a good threat, beats action any day.

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