Wednesday, September 29, 2010

The ACCAN "super complaint"

The weekly ACCAN newsletter drew my attention to this article in the SMH about the ACCAN "super complaint" on the cost of 13/1300 and 1800 calls from mobile phones.

As I said about this in my first comment on it, it is a little distressing that this issue has taken consumers so long to come to grips with. It is particularly distressing to see the naivety of various help-lines as demonstrated in the SMH story.

They are the customers of the providers of the 1800 and 13/1300 service providers. They pay those service providers a per minute charge to reflect the fact these are "B party charging" numbers. If they wanted calls from mobiles included they needed to ask their service providers to do that for them. The cost would have been higher, especially back in the earlier days of mobile services. As I noted there was an "originating service" declaration that was designed for the voice providers to get the mobile services included in the free/local rate arrangements.

It is probably not too late for these organisations to "provider shop" and see if anyone will come to the market with a 1800 13/1300 offering that incorporates the cost of the calls from mobiles. This issue there would be what is the access price for the undeclared originating access that the mobile operators could provide? Is it something like the current retail price of those calls now, or is it more like the price of the (declared) mobile terminating access? (An economic argument would tell you the latter).

What has made the issue particularly prevalent now is the growth of the so-called "capped" plans. This has highlighted the issue in two ways. The first is that these calls can fall outside the cap (to many customers' surprise) and hence result in unexpected charges including the category of "unexpectedly high" charges. The second reason is related to this but is more pernicious. The marketing of caps is typically conducted as "X dollars worth for only Y". The X dollars worth is based on the call rate used to calculate prices charged once the "cap" is exceeded. As an incentive for over purchasing the cap, and to increase the supposed "value", the call charges outside the cap have been increasing. The consequence is that the 13/1300 and 1800 call charges have been increasing despite supposedly declining prices over-all.

Ultimately consumer groups need to be complaining more about the whole structure of capped plans, the anti-competitive affect of differential on-net and off-net pricing, and the misleading and deceptive conduct at the core of the claimed value.

I am no lawyer, but I think that ACCAN rather than seeking a new "super complaint" power could more productively initiate its own proceedings - either to injunct the telcos from engaging in that marketing behaviour or to seek damages for the affected consumers.

Monday, September 27, 2010

Rewriting history

Communications Day today has a lead story that begins;

Shadow communications minister Malcolm Turnbull has sought to shed his
media-bestowed mantle of ‘NBN demolisher’, instead emphasising the need
for transparency, accountability and more informed debate on the project.

I thought this a big call - I'm sure I heard Tony Abbott utter the word "demolish" in his press conference announcing the shadow ministry. He did but the usage was a little more nuanced than the media has since used it. He said, in part,;

Who better to hold the Government to account here than Malcolm Turnbull, who is restored to the Opposition frontbench as Shadow Minister for Communications and who has the technical expertise and the business experience to entirely demolish the Government on this issue.

So it is not the NBN that Mr Turnbull is seeking to demolish, merely the Government. While that leaves open the other question of how constructive the coalition plans to be, there is nothing wrong with "holding the government to account". However, to date the coalition has not done that, it has simply sought to delay and obstruct the NBN.

On the single biggest claim - the call for a benefit-cost analysis - it is not good ground for Malcolm Turnbull. Do we all remember his $10B Murray-Darling plan, that not only had no CBA it had not even been referred to Treasury before being announced.

He also demonstrates that he confuses a CBA with a financial analysis, ka a business case. The business case is inherently part of the NBN Co business plan. I am bemused about how anyone expected the business plan to be prepared by anyone other than NBN Co.

The one legislative issue should be the question of the NBN Co enabelling legislation and the provisions in it for providing the shareholding Ministers with a business plan. That part of the Bill could be amended to ensure greater "transparency" of the business plan. It might not be viable to make it full public but it might well be viable to expose it to in camera scrutiny of a joint house committee.

Depressingly, Malcolm seems to have learnt from the republic debate all the tricks the monarchists used to kill a good idea.

Customer service in Telecoms

In a press release announcing the publication of submissions to the Reconnecting the Customer inquiry the ACMA chair Chris Chapman let industry have it with both barrels, saying;

There has been a healthy response from members of the public and consumer representatives. But frankly the response from industry falls short of what we had expected, given the early positive signals from industry chief executives.

Too many of the submissions were little more than reiterations of the current self-regulatory framework and cautioned against any regulatory intervention. I was surprised the telcos did not come up with more constructive solutions to issues they admit are major problems.

I look forward to the industry stepping up with positive proposals to remedy the problems.

I personally find this quite depressing because industry did seem to be initially grappling with the issues. (The submissions don't actually seem to be there to download right now).

However, it can in part be that this is a reaction by industry to the direction of everyone else. The only consumer submission I have seen thus far is that from ACCAN which seems to equally only parrot a decade's worth of comments and rests on a conclusion of the need for more direct regulation.

My own view is somewhat nuanced. I've previously written that, while everyone lumps co-regulation and self-regulation together, that in reality we've never actually tried self-regulation. I also have a view that to try self-regulation may involve some "reverse onus of proof" activities and some programs designed to actively facilitate comparison of offers, views I've shared with industry.

The report in the SMH said that Optus "rejects the hypothesis expressed in ACMA's paper that systemic and enduring customer experience issues do exist", while VHA and AAPT "criticised the ombudsman complaint process."

Meanwhile Telstra said "higher expectations from customers had pushed up complaint levels in recent years," and added it "does not believe the current challenges impacting customer service and complaint handling warrant regulatory intervention."

Which is all really interesting, except that telco customer service really does suck. I remember a great line from AAPT when we embarked on the journey that included the re-branding, the Tell It Like It Is campaign and ultimately Hyperbaric (see note below). CEO Jon Stretch crafted the line that "being the least bad in the industry does not mean you are good."

In the CommsAlliance submission they resort to quoting the ACMA derived stats on "customer satisfaction". However, inside the industry they don't use customer satisfaction scores as there is a case that they are not good predictors of commercial success (see second note below). Instead they use a thing called a Net Promoter Score. A study by Engaged Marketing in 2009 compares the NPS for a few service industries - the averages are detailed in the graphic below.

The poor performance of the mobile networks replicates the data from Mark Ritson in 2006. (see also).

The Australian telcos can perhaps take some comfort from a comparative study that suggests there is a "cultural bias" in Australia that means we expect better service (but don't tell that to the tourists who usually complain about abysmal service standards in Oz). It does not however absolve them from the comparative performance across industries.

It is disappointing that the only counter-data is a member survey conducted by ACCAN. This survey had a very small response rate (45 respondents) and the nature of the questions allowed the answers to revolve around things like "overseas call centres".

To this could be added my own research exercise. This had a slightly higher number of respondents and used a methodology on building on a description of a "quality service provider" already developed by the Consumer Council of ACIF. That research identified that the important areas to consumers in which performance was worst were;

* The service provider is proactive in managing quality, and prompt to repair faults.
* The service provider delivers when and what they say they will, with simple instructions on how to use the product.
* The service provider exhibits ‘best practice’ by being open and transparent in its operations, by taking accountability for its actions, its products and services and its commitments and by being credible; acting with integrity.

These may seem amorphous but really are just degrees of being responsive. These can be contrasted with the four high ranking issues in the ACCAN research;

* Multiple transfers to get to the right person to deal with your issue
* The cost of contacting customer service (e.g. when calling from a mobile)
* Poor access for people with disabilities
* Outsourcing of contact centres overseas

Ultimately the issues are slightly more complicated, they relate to the way products and services are marketed. The "confusopoly" is now confusing the IT department and the customer service staff.

Finally, I attempted another online survey recently that only had 37 respondents. This asked two questions, how good was the level of customer service in various industries and whether it had improved or declined in the last twelve months. Zero is acceptable/no change, negative is poor/got worse and positive is good/got better.

Industry                 Service
                             Level                 Improved
Airlines                 0.31                    -0.28
Banks                 -0.11                    -0.03
Health Insurance   0.24                    -0.21
PC & Elect Retail 0.11                    -0.24
Grocery Retail      0.32                      0.22
Telecc SPs          -0.68                    -0.31
Property insure     0.17                    -0.06

That is telco service providers have comparatively the worst standard of customer service and the perception is it is declining.

Ultimately the telco customer service conversation needs to be engaged in better by all.

1. Customer satisfaction as a single shot number is a poor measure because it really maps the gap between expectation and performance.  Consumer expectation is learnt, and hence declines as performance declines.  As a consequence customer satisfaction tends to trend around 70%.  The NPS asks people are more direct question of whether they would recommend their provider and measures the promoters (9 and 10) minus the detractors (1 to 6 (r is it 5)).  The other alternative to get meaning into customer service scores is to measure them across industries or to ask whether it has improved or not.

2. Unfortunately this was another case of AAPT changing strategies mid-stream.  Before hyperbaric had finished it morphed from being all about the brand promise and tried to be about cost saving.  This was despite the project having some serious project management around t.  Unsurprisingly when you change the objective mid-project you achieve neither the old or the new objective.

Tuesday, September 21, 2010

The separation of Telstra

Renai le May writing for itWire has reported on Posum’s excellent expose of the cant inherent in calls for a cost benefit analysis of the NBN.

However, his suggestion that the solution to the problem could have been simply found in the separation of Telstra ignores the complexity of that issue. The single biggest difficulty with an externally imposed separation of Telstra was always that the there is no really simple dividing line in the existing business – systems are vertically integrated, the voice switches at the edge of the network are inherently part of the trunk switching, and even the way DSL is offered as a line sharing service differs technically in the way Telstra supplies to itself and others.

At a seminar organized by the Competitive Carriers Coalition and AAPT in 2005 on the need to improve broadband access in Australia it was identified that the time to achieve separation was when a new access network was built, not separating the old network. The staff of Shadow Minister Stephen Conroy were eager listeners.

We also need to remember that the national conversation about the need for a new access network was started by the owner of the copper network, Telstra. They did this in their FTTN proposal to the Howard Government in mid 2005. In their initial proposal the wholesale service was going to be of a lower standard than the one they supplied to themselves. Over the ensuing year it was not regulatory “certainty” they sought so much as simply a higher access price.

The ALP’s NBN Mark 1 plan was always as much about securing the restructuring of the industry as it was about Government funding of the network. It was the ALP’s expectation that an offer of a Government injection of $4.5B to build a new access network that needed to be structurally separate would create sufficient incentive for Telstra to voluntarily do so. The difficulty with this strategy was that it didn’t count on the brinkmanship that the then Telstra Board and Management were prepared to play. As the deadline for bids grew closer Telstra demanded that the separation requirement be removed. How they erred into believing this was at all possible is one of the imponderables of life – I have my own theories but they are only that.

When they put in their short form bid as part of this stand-off Telstra made a fatal error of not meeting technical bidding requirements (despite employing at least three legal firms on the bid, none of them reviewed the final letter), the Government had no alternative but to exclude them.

In the intervening four years since FTTN had been proposed by Telstra the FTTN technology had moved on apace. No one disputes that eventually we will want to take fibre all the way to the home, the question has only been when. (As an aside a major fault with the Henry Ergas CBA is that he never allows for the fact that using alternative technologies only results in the need to defer the FTTN build not can it completely). The expert panel concluded that over an eight year build cycle it was more cost effective to start building FTTN now and not do a two stage build.

This decision then completely changed the relationship between an NBN build and Telstra. No longer was Telstra critical as the copper loop was not part of the build. The deal that NBN Co has done with Telstra does however reduce NBN Co’s biuild cost and de-risks the revenue line, but it did not need the deal more than Telstra did.

Finally can we all remember that in Australia’s metropolitan areas there are many people not able to receive any fixed broadband, either because the copper runs are too long, or because there is fibre or an active line sharing device on the path.

Monday, September 20, 2010

And now to broadband - briefly

Ah, so while I was away the Government became the Government again, largely because the coalition which trumpets itself as the party of the bush because it contains some Nationals couldn't get a broadband policy together.

As I wrote before the election, the coalition were captives of their past in framing their communications policy. It is therefore reassuring to see Chris Pyne referring to the idea that the coalition will refresh their policy approach. Similar comments were made by the actual shadow Malcolm Turnbull as "In a wide-ranging interview with The Age, Mr Turnbull signalled the Coalition would develop a new broadband policy for the next election rather than stick with the approach taken to this year's poll."

hat has not stopped Turnbull already blathering on about the need for a "cost benefit analysis". A very good piece on why a CBA may not be what the commentariat think it is was re-run today. It might obviate my need to do a similar piece.

Possum Comitatus at his Pollytics blog picks up the main points that a CBA is different from a financial analysis or business case, that the timescales used are longer and that the CBA would be meaningless because of the degree of uncertainty. Put it simply we pay politicians to make decisions - if everything could be decided by simple analysis you'd leave it the bureaucrats alone.

There are some bits he leaves out. The first is that if you are using CBA for comparing projects because of a limited capital pool, then you a) need to do the CBA on all projects not just one, and (b) rather than just an NPV on the benefits over costs you should use a benefit-cost ratio. I have never seen either actually done for any public policy of any magnitude. They are usually restricted to relatively small scale projects.

The second is that a CBA is based on a thing called the "compensation principle" - a benefit to me offsets a cost to you if my benefit is bigger than your cost bcause I could notionally "compensate" you for your loss. This is made worse because a dollar gain to a millionaire is regarded as the same "value" as a dollar loss to a pensioner - even though we know the two "value" that dollar differently. In brief CBA is inherently anti-egalitarian - hence the reason why Australia's private CEOs club (mis-labelled the Business Council of Australia) so favours them.

Let me save or later the conversation on whether advancing the regional deployment changes the priority on wireless.

A grab-bag of telco stuff

Ahhh what a great day to return to work. Reports emerged today about both the industry and consumer submissions to the ACMA's Reconnecting the Customer inquiry.

The industry submission (which I couldn't find at the Comms Alliance or the AMTA website. UPDATED - available here) is reported to blame "technology-challenged customers for the surge in complaints about phone and internet services." As I argued in my CPRF paper (subsequently printed in the TJA) this predicament is of the telcos making.

There remains a possibility that the current predicament occurs because the marketing departments of telcos are over-estimating the ability of both customers and call centre staff to understand the details of increasingly complex products. This would then compound the difficulties created by language in the conversation between customers and their service providers.

An extension of that hypothesis would be that the industry collectively needs to take action to manage its use of language to better enable customers and providers to converse. The ACCC
has seen fit to take the industry to task over language that might be misleading within the definition of the law. However, well before that threshold the industry’s way of using language (e.g. ‘uncapped’, ‘unlimited’, ‘cap’ and ‘coverage’) can be sufficiently confusing customers so that providers cannot be seen as offering quality.

Meanwhile Jessica Irvine writing in the SMH of her own personal telco experience argues that all would be well if we just got the competition structure right. I agree with her that there is an important issue of market design here, but I don't think it is as simple as structural separation and all competition is good. There are reasons of information asymmetry that mean competition alone does not improve customer service - as customers are limited in their ability to asses service standards. Equally simple price comparison is not sufficient.

Finally we come to the campaign launched today by ACCAN over the price of calls to 1800 and 13/1300 numbers from mobiles. The issue over the higher than fixed calls pricing of these has emerged now because they are not included in the so-called "caps" on mobile plans. With the increased prevalance of 13/1300 and 1800 numbers this is only now becoming an issue.

The matter could have been resolved by the operators providing 13/1300 and 1800 services years ago by invoking the declaration on mobile originated calls - a declaration that applied only to these B party pays type services. The fixed line operators had no incentive to do so because the price of the access would have looked like the price of terminating access. In those days this was about 23c per minute.

As the declaration was not used it has now been revoked so the ACCC has lost its ability to fix the problem. The possible solution might be for the ACMA to provide claritry through the numbering plan about the charging principle - but even then the ACMA is out of step as everyone charges the old local call fee (25c) for fixed 13 calls - not the current price cap figure (22c) nor the more logical rule that they actually be charged the same as an actual local call.

The mobile network price structures are becoming more perverse, with proliferation of free "on-net" calls and strange caps being subsidised by these outrageous 1300 and 1800 charges.

Meanwhile I note that the ACCC has initiated action against Optus for its think bigger and supersonic campaigns. I don't think the action is based on my own criticism of these plans. I do note that my friend Bob Kuhn (the voice of the Queen My Lord is Much Much Better) noted that the supersonic claim was simply dumb - you'd actually like your internet connection to run at the speed of light not the speed of sound! (Let's not confuse "speed" as in metres per second with "speed" as in bits per second again!).

In the same conversation I relayed the story of Stephen Conroy comparing fibre to wireless and saying something to the effect that fibre was faster because it is light. For the record they are both forms of "light" - that is electro-magnetic energy (waves or particles). The "c" of reltivity is the speed of light in a vacuum - it is slower in the air (radio) and even slower in glass (fibre) - the slowing depends on frequency, hence why a prism splits the frequencies of the rainbow.

Now there is heaps more of stuff to read on the NBN and stuff.

Oh - back to the topic of this post. It looks to me like ACCAn's campaign and their "super-complaint" has been timed to accompany their submission on Reconnecting the Customer. They have made their "super complaint" to back the case for "super complaints". I haven't read the detail - but I'm not sure the addition of a specific complaint provision is required to achieve the outcome.

Meanwhile everyone continues to talk at cross purposes. ACCAN specifically wants the Act to de-prioritise "self-regulation" while they really are criticising "co-regulation". As I've argued elsewhere, self-regulation hasn't really been tried. The difficulty I have with the position of the pro-regulation crowd is that it does stiffle the innovative benefits of competition, but I also don't buy the idea that competition alone provides better customer service or that "more information" solves the information problem.

What everyone should be able to agree on is that there is a great deal of customer confusion and there is a great deal of customer dis-satisfaction. If we could spend a few days discussing what we agree on then we might be able to move forward on what the solution is.

States rights

One thing that gets consistently high support in opinion polls is the idea of abolishing State Governments. In fact, faced with the choice of the ALP and the coalition in NSW it looks like an "Abolish State Government" party might be our best hope. I'm seriously considering forming it, so contact me if you are interested. (There is an e-mail link here somewhere - or just post a comment).

However, we do have wildly inconsistent views on the issue of State rights - as best exemplified by the Greens. It has been reported today that the Greens plan to introduce legislation to repeal the Howard legislation that overturned the NT euthanasia laws. In doing so he said "This won't bring in euthanasia, but it will restore the rights of the territorians to be able to legislate for euthanasia the same as everyone in the states."

Conveniently for Brown he'll be able to use the same argument in the case of the Queensland Wild Rivers legislation which we are also told will see a private members bill from Tony Abbott seeking to overturn the protection of these rivers on aboriginal land so that the traditional owners can exploit their economic potential.

But where, I ask, does that leave Bob Brown on the cause in which he made his fame? He led the campaign against the Franklin Dam - a dam that was stopped by the Federal Government using its external affairs powers to over-rule state laws.

States rights is a convenient slogan for anytime a political party favours the action of a state - and are totally forgotten when the politics runs the other way.

Sunday, September 19, 2010

Component Pricing

I do tend to rant here a bit about aspects of competition policy and regulation. One good move in Oz has been the rules on component pricing - this requires the advertised price to be the total price.

Its most notable purpose was in relation to "cheap flights" which quoted airline prices without the taxes which were then charged separately. Unfortunately its not all that isn't included (think expensive cab fare to out of the way airport).

This comical look could equally be written about telcos.

Many thanks to A.W. (Red) Steel for the original link.

Wednesday, September 15, 2010

Thank you Spicks and Specks

For giving me the opportunity to discover the real meaning of R&B.

Sunday, September 12, 2010

The Top End

All quiet on the blog front as I rest up on the classic round trip Darwin-Kakadu-Katherine-Litchfield-Darwin.

Feeling refreshed from a day cruising and swimmining the Nitmiluk Gorge (aka Katherine Gorge). Two comms issues come to mind.

You can't miss the microwave towers in regional Australia - you can understand why they want fibre. I gather down South there is a suggestion the Gillard deal with Windsor/Oakshot brings forward NBN wireless. That would be the wrong move. What needs to happen is acceleration of satellite and deal with the changed economics of an outside-in fibre build by stretching the project to ten years from eight.

Meanwhile Kakadu park entry is $25 for 14 days. A telco would package that as $12.50 per day, minimum purchase 2 days with twelve extra days - value of $175!

Thursday, September 02, 2010


Simon Benson's Betrayal is a tale that is meant to tell of the betrayal of Morris Iemma by Kevin Rudd, but is ultimately an insight into the betrayal of Karl Bitar and Mark Arbib that subsequently Kevin Rudd himself experienced.

A part of that story was the relationship that developed between these two players as Secretary and Assistant Secretary of the ALP, and the other Assistant Secretary - the position bequeathed to the Left under the "power sharing model" in NSW, Luke Foley. In reporting on Foley's maiden speech in the Legislative Council the Australian refers to the fact that "Mr Foley was notable during his tenure at the party's Sussex Street headquarters for the close working relationships he formed with his right-wing counterparts."

It is therefore deemed newsworthy by the Oz that Foley has "In his inaugural speech in state parliament yesterday, Luke Foley slammed the "empty pursuit of power" that has characterised NSW Labor machine politics in recent years." In reality he didn't - in his speech the comment was in reference to his support of party politics, and the important role parties played in making sure democracy wasn't just a parliament of the rich.

Yes he did say;

Above all, I am Labor, committed to equality, solidarity and social justice. I believe in the principles of the party and in a party of principle. I have been a member of the Australian Labor Party for 22 years. I served the party in a full-time capacity as Assistant General Secretary of its New South Wales branch from 2003 until June this year. I have some experience of Labor's remorseless internal politics. I have always felt that our members and supporters deserve a party machine worthy of Labor's message. Political power is a means to an end; it should never be the end in itself. I reject the empty pursuit of power. There is no honourable political future for a Labor Party that will not uphold courageously the principles from which it draws life. My political involvement has a purpose and a direction. My idealism imagines a better kind of world.

In this he was doing the very standard new member speech as the prelude to talking about "the principles" he wanted to "uphold courageously". What were they? "My values are social democratic values." To paraphrase Foley

Providing these things (that are so often the preserve of State Government: modern schools, state-of-the-art hospitals and community health services, accessible public transport, safe streets, a flourishing artistic and cultural sector, social housing, and our natural environment protected for all to enjoy) which only the community, not individuals acting alone, can provide—should always be the essential purpose of any State government.

It is that essential purpose that led this State's very first Labor Government, Jim McGowen's, to build the garden suburb of Daceyville to provide housing for working-class families. It is that essential purpose that led the Cahill Labor Government to build the Sydney Opera House, and it is that essential purpose that has led this Labor Government to rebuild or upgrade nearly every major hospital in this State since 1995.

Hardly a ringing endorsement of a grand social democratic vision. Of more interest was his rejection of the "totalitarian right" where he said;

I do not believe that, in today's world, human rights are the exclusive preserve of Westerners. Anti-totalitarianism is at the heart of my politics. Today a totalitarian movement of the far Right is threatening pluralist democracies and the lives and freedoms of people in many societies, including our own. This global Islamist movement is misogynist, racist and homophobic. This movement's extremist ideology is, of course, based on an utter perversion of the Islamic faith. Too many progressives are silent about this or deny this. Governments everywhere have a profound duty to protect their citizens from the threat of extremist Islamist terrorism. I intend to maintain an active interest in this over my time in this place.

Meanwhile writing about the last minority Government in the Oz was the great Rodney Cavalier. Worth a read, but the detail on Rod said "His book, Power Crisis, on the crisis of organisation and belief facing the ALP, will be published in October." Now that should be worth a read.

Historical footnote: Rodney Cavalier was also a member of the Senate of the University of Sydney with the two males in this photo.

Novae Meridianae Demetae Dexter delenda est

Another question for AAB

In posing some (excellent) questions to the Alliance for Affordable Broadband Computerworld states;

I think we can all agree right now that everyone wants “a competitive National Fibre Backhaul Network (NFBN) platform”, and it is something all parties have put forward plans on.

I'd like to put up my hand as one person who doesn't agree. The basis for my disagreement is the meaning of the word "competitive". The simplest economic justification for competition policy is economic efficiency - this is defined using a standard known as Pareto optimality and refers to a case where "no one can be made better off without making anyone worse off". For the purpose of policy analysis this is usually accompanied by a "compensation principle" which adds the rider "or those who are made better off could compensate anyone made worse off".

But at its simplest the justification is based on a theory that in a competitive market prices are set to equal marginal cost - that is the technical meaning of a "competitive price". One of the core assumptions is that the supply curve "behaves" - most specifically that it is upward sloping. The whole theory struggles once you have production technologies with increasing returns to scale - the marginal cost is always below average cost so marginal cost pricing is loss making. Its more practical limitation is that the high fixed (and sunk) costs means there is a dramatic divergence between short-run marginal cost and long-run marginal cost. In an actually competitive market once the upfront investment is made each competitors short run profit is maximised by pricing closer to short-run marginal cost - which is even more loss making than long-run marginal cost.

The second feature of the production function is that costs are "sub-additive" - in other words all the output can be produced more efficiently by one provider rather than two. This means it is counter-intuitive to duplicate infrastructure on the belief that "competition" will drive down prices.

he example cited by Senator Conroy earlier in the year was to compare pricing per Mbps of capacity on the (monopoly) Perth to Port Headland route to the (competitive) Perth to Sydney route. The analysis completely ignored the fact that the cost to build is flat rate per kilometre, whereas the revenue available depends upon the number of "communicators" at each end of the link.

And ultimately this is the problem for regional Australia. We don't make backhaul cheaper to a country town by duplicating the existing fibre. Worse any investment in duplication ultimately denies other towns access to fibre. Just ask those towns still connected by radio backhaul what their priority is?

Now people familiar with policy debates will think this sounds similar to the arguments from the 1980s about how competition would drive up the prices of long distance calls on thin routes but down on thick routes. The actual outcome has been the elimination of all price discrimination on "national calls" including the erosion of the peak/off-peak distinction. The reason for this distinction is the way calls are sold - telephone calls are sold as a "bundle" - you buy the right to ring everyone not the ability to call different places. The nature of the competition for the bundle has seen the ability to maintain price discrimination break-down - the providers need to average their costs. This does mean that providers make losses on some actual phone calls - a position the accountants always find troubling, the economists fully understand and the marketers simply don't understand.

The difficulty with rural towns is that not very provider has to go there to offer a service. Most importantly the "competitive providers" can choose where they offer service. They do get involved in the "cherry-picking" we were always threatened would be a consequence of competition.

Now my analysis of the backhaul market is open to critique - especially by one of the Cynical Seven who built a business selling backhaul, and another for whom it is one of his few remaining assets. These competing investments have found customers and have in cases been profitable (but don't tell NextGen and IP1 that). The reasons for that vary - not least the fact that the primary provider does undertake a degree of cross-subsidy and doesn't always have all the capacity required - but primarily bcause it is a reluctant wholesaler that is not trusted by its customers. The second reason is that purchasers have also used the competing providers as a way to provide diversity.

However, even diversity is better provided by including all the traffic in a single well designed network.

All this means that the country is not better served by a "competitive backhaul network" if "competitive" means actual cost based prices. The country is probably better served by a structurally separated monopoly backhaul provider that charges the same "price per bit" at every point of interconnection. This is the proposal that was put forward by Axia and that no one seems to really understand.

Now that monopoly needs to be constrained to a "cost based" price - and that's where the loss of the dynamics of competition cuts in. Structural separation alone does not guarantee this, and a regulator suffers from the fact that the quantity actually purchased has a huge impact on what the price needs to be. There are indeed market mimicking mechanisms around this....but now is not the time for this.

Is it too much to ask that we actually check all the assumptions?

Novae Meridianae Demetae Dexter delenda est

Wednesday, September 01, 2010

We believe in fairies at the bottom of the garden

A group of industry luminaries trading under the name of the "Alliance for Affordable Broadband" has released what Stuart Corner called a manifest proposing an NBN 3.0 to be largely left to the market.

I would probably call it a manifesto, rather than a manifest because it has lots of points that start "we believe".

My comments here are not designed to advocate for or against any of the existing broadband policies doing the rounds. They aren't offered as the views of my employer. They are however observations on the claims of this group, just as I'm prepared to make observations about other claims.

Their beliefs include that infrastructure based competition has worked - despite the fact that the bulk of broadband competition takes place over Telstra's copper network asset. ADSL is not, and has never been, infrastructure based competition.

Where there has been infrastructure based competition has been in HFC - a failed model as both builds stopped after 3 million households were passed by 2 networks and the rest were passed by none. Mobiles is the only space where there can be any claim to sustained infrastructure competition - though one of the signatories is the CEO of a company that failed to build such a network (before his time). Meanwhile the mobile industry is as stubbornly concentrated now as it was in 1992 despite the fact that there has been a policy bias towards new entry.

But the alliance is seriously mistaken if it believes a wireless network capable of delivering 100Mbps could be delivered now if only the additional 4G spectrum were available. It is further mistaken in believing that the 700 MHz or 2.5 GHz could be made available any time sooner than currently planned.

But the final delusion is that we don't want a national monopoly FTTH but they do seem to want a national monopoly on the 4G network as a mandated private sector wholesale only investment.

Can we just remember that the people who started all this were the private sector owners of the national monopoly network who said to the Howard Government in 2005 "we need a new customer access network but will not build it under current law". I'm also waiting for anyone to show me the "cost-benefit analysis" for any communications policy ever implemented in Australia (a CBA not being the same thing as a business case).