Wednesday, January 08, 2014

Business, Economics and Strategy

Former Internode execs Simon Hackett and John Lindsay are no longer parts of iiNet. 

Mr Hackett we know resigned from the Board of iiNet to take up a position on the Board of NBN Co. ZDNet reported this week that Lindsay had "quietly departed" from iiNet, though Delimiter today reports that Lindsay was made redundant.

I wish them both well. They, like Michael Malone at iiNet, feature in my allegory about understanding "purpose" in business. Both firms were founded by people who liked the internet at university and wanted to make it available to themselves and friends after university.  (In Malone's case making it available to friends was about subsidising his own access). Focussing on that purpose enabled them to establish a valuable business.

But this does not make either of them infallible. 

One of the quotes attributed to John Lindsay in the ZDNet article was "If you build something like a new network that has abundant capacity and then you arbitrarily limit that for commercial ends, you've basically created artificial scarcity."

While this may refer to the CVC issue, I believe it also relates to a concern that differential pricing for AVCs is wrong. My reason for that belief goes back to discussions at the time the "G9" was putting together an alternative FTTN proposal. A sticking point was determining pricing structures - and the representative from Internode (not John by recollection) argued that we should charge the same price per port because that is what the cost base was. The same reasonin would be that AVC charges on the NBN should be the same as the cost is the same.

It is relatively easy to demonstrate why that doesn't, or mightn't, work. It is because different consumers have different preferences expressed as willingness to pay. Let's assume we have two customers. Customer A is prepared to pay $3 for a 100 Mbps service but only $1.50 for a 10 Mbps service. Customer B is prepared to pay only $1.50 for 100 Mbps and only $1 for 10 Mbps.  As the supplier we have one expense which will provide two 100 Mbps services, but we can limit them to 10 Mbps (with the unused 90 not available for sale).

If our costs are above $4.00 but we sell only one product which is the 100 Mbps one, at an averaged price we can't make a case that recovers our cost.  The average price will be $2.00 and customer B won't pay it. With differential prices Customer A will pay $3 and B $1. 

When it comes to the NBN this is significant, because the bottom price tier is essentially set at the price of a voice access line - because some of these customers will only be using it for that.

So having a price point that limits capacity can create supply, nor reduce it.

Simon Hackett in his defence of HFC on his blog said "Despite claims to the contrary, this use of shared segments in the last part of the [HFC] network is also the case in the existing NBN fibre (FTTP) design....The trick (in both technologies) is to keep the contention ratio acceptable in each of these shared segments. There is a commitment in the NBN HFC context to do that, just as in the FTTP rollout, so that the result is great for all users."

I don't think this is technically correct. While the 1 Gig plus of fibre from the FAN is repeatedly split in the FTTP scenario, it is split in a controlled way. There is no actual "capacity sharing". More specifically the RSP can be sure about how much capacity a fibre customer will have available in the AVC, they can't be sure in the case of HFC.

Hackett and Lindsay are both projecting their experience from how they ran an ADSL2+ network.  The economics and strategy question for a national broadband network are different. 

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