Broadbanding America

In a speech US FCC Chairman Julius Genachowski has outlined plans for revision to the universal service arrangements to get broadband to rural areas of the USA.

In introducing these reforms he spoke of his visit to Libery Nebraska.

When I was in Liberty, I met with a group of residents at the local American Legion.

The people I met had a lot in common with all of us and all of America. They work hard. They care about their country. They care about their kids. They believe in the American dream, and want their community and children to have as much a chance for success in the 21st century as they had in the 20th.

But in one important respect, their lives are different from most Americans. Most of the people living around Liberty don’t have access to broadband. The infrastructure for high-speed Internet simply isn’t there.

I don’t know whether, a few years ago, they were concerned about the absence of broadband Internet where they live. But during our discussion, the group I met – which ranged from seniors to students -- was very clear that the absence of broadband in their community was having real costs and consequences.

One older man said he wanted to open a hunting lodge. He said he was sure it would be successful, but that without broadband it would be impossible.

A farmer at the meeting said he needs to participate in online auctions for equipment and cattle. He said he can’t without a fast Internet connection that allows him to bid competitively in real-time.

Two parents told me about their son, a young serviceman who has done three tours of duty. His friends overseas were having video chats with their families, but he couldn’t.

Other parents at the table spoke about how their daughters couldn’t access the Internet at home to research papers or email their teachers. They said many of their classmates who lived in other towns were online, and they just wanted the same opportunity for their kids.

It’s not just a theory. It’s a fact. Broadband has gone from being a luxury to a necessity for full participation in our economy and society.

There followed the most horrible description of the failings of their Universal Service Fund and Intercarrier Compensation arrangements. Unfortunately the mess that he was describing as the "Connect America Fund" and the "Mobility Fund" did not really sound much better.

To Australian ears they were sadly reminiscent as the kinds of failed broadband programs we experienced prior to the NBN.

More importantly they constitute the kind of externalised transfer payments that Gans and Hausman think is better than a Government built network.

I have responded to Gans' challenge and made a submission to the ACCC on Telstra's SSU. In that I outline the direct and indirect network effects of broadband and the reasons why the Government's NBN plan is an effective way to internalise the externality.

A real pity that the USA cannot embrace the idea of Government owned infrastructure. They did early in the 20th century briefly consider doing it to the telephone. It is not too late, and far more efficient than spreading cash thinly across poorly designed network initiatives.


Novae Meridianae Demetae Dexter delenda est

Josh Gans sets the challenge

Joshua Gans seems very pleased that his whole interview with Alan Jones went to air.

He made a point that no submission to the ACCC has said "Gans and Hausman are idiots". That is true - my comments thus far have been reserved for my iTnews column titled When smart people say dumb things.

Meanwhile other submissions in the same proceedings are reported to claim that Telstra's separation proposals do not go far enough.

It is an unfortunate fact for Optus that there is such a thing as the public record. The fact that Telstra's structural separation is progressive over the life of the NBN deployment is not new; it is a consequence of the legislative prescription.

To the Senate committee inquiry into that Bill Optus submitted;

If implemented in its present form, Optus considers that the reform package will provide the foundation for stronger competition to emerge in the fixed line sector.

The Competitive Carriers Coalition was at least alert to the issue, but recognised the difficulty of concluding both a functional and structural separation. They submitted;

The CCC suggests that the ACCC be given guidance that any undertakings show how the management of Telstra’s wholesale business will be organized to remove incentives to iscriminate during the period of a staged separation, and to that the guidance detail certain minimum requirements.

However, the facts as I understand them is that the legislation was not so amended.

Meanwhile, I'm really looking forward to round 2 of Jones and Gans. Jones invited Gans to agree that the ACCC was an inadequate regulator as it hadn't acted on the Coles/Woolies duopoloy nor "shop-a-dockets". I suspect Gans' view here is closer to the ACCC than Jones - though I also wonder if anyone has explained the Metcash decision to Jones.

Note: I must admit to finding a certain irony to the joint submission by Professors Hausman and Gans. I had an "altercation" in a previous life with Hausman. He had written a submission for Optus on regulation of mobile terminating access. I commissioned Josh Gans to write a report on the Hausman submission.

Needless to say he did an excellent job....so much so that Professor Hausman complained to my parent company about "friendly fire" as he had written a very similar report for them in New Zealand. And yes, the Commerce Commission did in the end use the report I commissioned from Josh Gans to critique my parent company's position.

The point is not so much that it is now strange to see the two writing a submission together as that matters of economics are, indeed, things on which even great minds can differ.

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The origin of "Confusopoly"

The Surgeon of Crowthorne is an absolutely fabulous book about a mad doctor who was a major participant in putting together the original Oxford English Dictionary.

That dictionary was significant as the first that tried to cover previous as well as current uses and try to identify earliest uses of words. Unlike other dictionaries of the era it was a descriptive rather than proscriptive work.

The word "confusopoly" has its origins in Scott Adams' The Dilbert Future. The word has been successfully used to describe many pricing issues.

Neerav Bhatt provided an excellent summary in a blogpost last year.

He cites the 2005 paper by Joshus Gans given at the ACCC's 2005 Regulatory Conference. I was there and it was the first time I'd heard the term and I have in the past been prepared to credit Gans with the first use.

That was until the Deakin University/ACCAN report Seeking Straight Answers: Consumer Decision-Making in Telecommunications was released. The report cites a 2004 use by Larsen et al. They wrote;

In reality the mobile phone market is a perfect example of Dilbert’s confusopoly. That is, various price propositions are on offer with different combinations of free minutes, texts, and other services, whilst in reality the same level of usage would result in roughly the same cost, leaving the user so confused that they simply choose the product with the name they like the most – a fact most notably recognised by the operator Orange with their animal-themed tariffs, such as Dolphin and Raccoon, and by LG who give their phone’s names such as Chocolate and Shine.

I have also found this use from the USA in 2004.

Does anyone have an advance on 2004?


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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

HP and AAPT

Great Wall Street Journal report on the management issues behind the HP mess.

The pity is it reminds me of so many other companies - AAPT springs to mind.

PS Thanks to Josh Gans for tweeting the original.

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Bitcoin

For the IT/comms types who read this blog, I suggest you read Josh Gans on Bitcoin to see commentary on it as money rather than IT.

Bottom line, I think, is that there is a market for a true "virtual currency", but that any private model suffers the same problem as does a private model of a "physical" currency. If you have a precious metal base you need to be convincing that you have enough metal, beyond that you are relying on a Government guarantee.

And I'm trying to figure out who earns the seigniorage - the difference between the value of money and what it costs to make it (recently the Australian Government has run into a problem with negative seigniorage on the 5c coin).

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