Wednesday, September 14, 2011

When smart people say dumb things

As if having Michael Porter blather on about HFC wasn't bad enough, Josh Gans and Jerry Hausmann have contributed to the ACCC consideration of the Telstra SSU.

They maintain it is anti-competitive because of the deal on HFC (not to be used for broadband) and the deal on 4G (not to be promoted by Telstra at time of copper shut down as an alternative).

They first draw conclusions based on completely different market structures about the role of HFC in driving broadband uptake. These mostly model HFC vs ADSL, not HFC vs FTTP. They also mostly come from markets that were clever enough to award HFC monopolies rather than our idiotic duopoly (see note - UPDATED).

But secondly they really don't want Telstra to keep its HFC at all, they think it should be divested.

Hang on guys - Telstra made an NPV negative decision to build the HFC to block the competitive threat from Telstra (see Frank Blount in book with Bob Joss "Managing in Australia"). Optus thought the overbuild was anti-competitive, mounted a legal challenge (for $900M) but settled for what Telstra told Senate estimates (24 May 2005 at P.74) was a "miniscule amount, a very small amount." Telstra isn't about to sell the HFC to Foxtel.

In fact I bet the Foxtel partners are still trying to figure how to unpick the Foxtel shareholders agreement to migrate Foxtel to the NBNs Multicast facility.

Never mind the fact that the footprint of HFC hasn't been expanded since about 1997. Never mind that Telstra and Optus have no interest in using the networks. I think they know more about the technical viability than a couple of Economics professors.

But Gans and Hausmann rail against the lack of competition, even writing, "The presumption and evidence thus far is that competition spurs investment in these industries – even when characterised by a natural monopoly." That may well be the case, but it certainly isn't efficient investment. A natural monopoly is defined as one that is sub-additive in costs - that for any level of output one firm can produce the output more cheaply than two. That's why you only have one water pipe to your home.

HFC and telephony originally did different things and competed in some areas - HFC never did telephony well, and copper never did Pay TV well - both could do broadband. FTTH does all three better than either HFC or copper.

The HFC case is just nonsensical, technically and economically.

The mobile issue is equally illogical. Telstra isn't the only wireless provider. Both Optus and Vodafone can be expected to launch 4G, and vividwireless already has. Spectrum auctions in 2012 could even introduce more operators (though experience suggests the market can't sustain more and that maybe less is better). So what if Telstra doesn't offer 4G as an alternative for the short period around decommissioning copper - V and O still can. Customers can still buy it from Telstra even, they aren't saying they won't sell it.

The clause is very much a very standard one between an upstream and downstream player where the upstream guy is making the big investment that the downstream guy will use best efforts to sell heaps of it. Its the contractual way of dealing with some of the known problems of not being vertically integrated that Henry Ergas normally jabbers about.

Meanwhile, just to show the planet is going completely crazy, Bob Brown has introduced legislation to restrict the construction of mobile base stations. Much as I would like to say I told you so the proposal is dumb on so many levels. Unfortunately AMTA's Chris Althaus didn't really nail it preferring to focus on the NBN issue.

Firstly the consultation called for already occurs under an effective and complied with industry code. Secondly mandatory spacing from schools simply increases likelihood the school falls into the middle of the beam of most intensity (Brown is a medical doctor, he should be able to understand simple physics). Let alone the idea that mobile operators can forecast their tower needs five years hence!

But the biggie - are you listening Bob Brown - is that the recent labelling of mobiles as a "possible" cancer risk relates only to handsets held to your head - not base stations. You know the best way to REDUCE the power that the handset operates at - be CLOSE to the base station which means have MORE of them.

In fact a really good solution is to have your very own femto-cell - just like Optus launched. Guess what - that gets connected using fixed broadband.

Can we please be allowed to get on with delivering the future now?

Note: The Keating Government was presented with a suggestion by a shareholder in Optus Vision that instead of OV and Telstra duplicating the country should be divided into a set of franchise areas for monopolies. In most circumstances this would have been the right thing. In the specific case he was right to say no given who was asking - Kerry Francis Bulmore Packer.

Novae Meridianae Demetae Dexter delenda est

1 comment:

Anonymous said...

I am perplexed by this response to Gans & Hausman.

Just because FTTH is technically superior to HFC, that does not mean that HFC could not be a source of competition for FTTH. Do you really believe that where HFC exists it is not a potential source of any competition to FTTH? Maybe not for high upload speed or for the fastest download speeds. But why not for lower download speeds?

Similarly with Telstra wireless. Sure V&O may still choose to enter, or more spectrum may provide other sources of competition. But in any of these cases why would there not be more competition with Telstra able to compete fully than without?