The Sorry State of Telco Regulatory Affairs

I probably need to do a longer piece on this, but saying as I do there is a sorry state in Telco regulatory affairs will win me no friends. Indeed, it might even find a few people ready to hurl personal accusations about me as being "bitter" over some imagined slight.

The reality is that the state of affairs I describe is one which is driven by the same set of issues that drove the GFC (the corporate focus on the short-term outcome) and the political values of Grahame Richardson (whatever it takes).

My first case is the Mobile Terminating Access Service (MTAS) and the ACCC's process for reaching a Final Access Determination (or FAD).

The process of the ACCC setting Access Determinations was the final abandonment of the approach that initially promoted self regulation (through the TAF) and "guided" market mechanisms (negotiate-arbitrate). The experience with both of these is worthy of analysis of their own on another occasion.

The position we now have is of a central price setting regulator with limited opportunity for judicial review of decisions. The first ACCC guidance on MTAS pricing principles was to utilise a retail benchmarking approach, that access fees had to decline at the same rate as retail prices. The consequence was actually a temporary stall on price competition, as the effect of a price decline for an operator were magnified.

The Commission's next approach was based on top-down cost models from two operators. These models in one case included a highly fanciful claim for a recovery of a notional fixed line externality through a "Rohlfs-Griffin" effect, and a claim for Ramsey-Boiuteux recovery of common costs. I say fanciful because the first exercise relied upon a number of parameters that had to be guessed, not just because they hadn't been estimated but because there is no methodology to measure them. It was also fanciful because it only introduced half the externalities present in the market. The R-B pricing was fanciful because instead of estimating an Australian set of own price elasticities they used the average of various studies from other markets. They then applied these - which had been estimated using a constant elasticity assumption - to a model with a linear demand curve (where the elasticity varies along the curve).

The Commission then commissioned a bottom-up model from WIK. As I wasn't actively engaged at that time I never analysed the WIK model.

The Commission commenced its current inquiry with a radical discussion paper that considered (1) the prospect of moving to LRIC rather than TSLRIC+ pricing, (2) the option of pricing mobile-to-mobile termination differently from fixed-to-mobile and (3) the option for a "pass through" mechanism of declining MTAS rates on fixed-to-mobile calling.

A consequence of the appeal to LRIC (which really takes common costs out of the equation) is an erroneous presumption that in the long run the cost of terminating a call is zero. The most egregious part of this is the error of assuming that as a curve approaches zero then it eventually reaches it, but the zero line is an asymptote of the curve and really is never reached. The per call cost approaches zero because, in part, of increasing volumes. If calls cost 0.001 cent per minute but there are billions (or trillions) of minutes then the payment owed is still positive and significant.

The draft decision thankfully walked away from all three "radical" endeavours, but in doing so has inadequately supported the prices it has determined. This creates the image of the ACCC as a capricious regulator.

Nowhere is this more apparent than in the F2M pass though argument, where Telstra has provided evidence to the Commission that its net take on fixed calling after costs has declined not increased. The ACCC could have done that investigation itself using its investigatory powers but has declined to do so. They also seem to have declined to even acknowledge the point Telstra has made. Mind you, Telstra seems to have insisted on keeping these details Commercial-In-Confidence even though they probably don't meet the formal definition (i.e. there is nothing in the data which would aid Telstra's competitors). (Note I provided a very simple version of Telstra's argument using publicly available data).

Meanwhile, Optus and Vodafone who both complain MTAS reduction without F2M pass through is a free kick to Telstra have not explained why if it is such easy money they haven't entered the market (in Vodas case a very simple F2M product by override code for existing Voda mobile customers would be relatively inexpensive to create, in Optus case add an F2M only override product).

Macquarie Telecom goes to a whole other plane of idiocy. They carefully argue that they don't actually acquire the MTAS (because they are a switchless reseller) and that the product they buy costs more than the sum of PSTN originating access (0.95c/min) and MTAS (9c/min). They don't seem to acknowledge that there is obviously a cost incurred in turning the two access components into a call, they also don't seem to contemplate the obvious answer - if you believe the cost of doing that is less than the difference between the sum of the access fees and what you pay for an FTM call, then bloody well just build the infrastructure.

The complete flip-side of that is Lycamobile pointing out that as an MVNO they are paying their wholesale provider an "airtime" rate for originating and terminating calls and that they are recipients of MTAS fees, so the decision results in a price squeeze on them. Well hello, whatever made you think MTAS wouldn't decline in the future? Have you got a regulatory events clause in your contract to trigger a renegotiation right? If not, go sue your lawyers and leave the ACCC alone.

The submissions are all the classic worst case of self-interest submissions that are not framed on the basis of an established view of how the market should operate, but instead focus on the specific "ask" of their business. These reflect the operation of the regulatory craft as something that takes instruction "from the business" rather than is intimately involved as the expert on the external environment on the development of strategy.

The ACCC deserves to be resoundly criticised for the way it has handled the MTAS determination thus far, but equally the submissions from industry players do little to handle the ACCC to account.

Nowhere, however, is the sorrt state of affairs more apparent than in the bleating by Internode (among others) of wanting to be "compensated" for the stranded asset of their DSLAM investments. The assets were not deployed like an HFC network with a thirty year or more life expectancy, more likely 2 to 3 years. None of them need to be retired immediately. The "exchange exit cost" has always been something they need to consider as a future liability.

Novae Meridianae Demetae Dexter delenda est

This is funny and cruel

Thanks to Stephen King for pointing out this cute clip called "Vodafail the musical".

I'm not sharing it to have a dig at them - I think somehow that their network issues have been over-stated. Plus I think the combination of a bit of customer churn and new network investments means that the VF network is about to be very very good.

(Interesting discussion can be had here about the timing of investments. A similar issue existed at Telstra once where they didn't invest in more "head room" on their Bigpond servers, a virus infecting their customers created a traffic spike and brought down the service. The story goes that they paid out more in compensation than the capital investment that they had delayed - and had to make the capital investment.

Anyone who thinks running a telco is easy should ask a telco engineer, a marketer and a CFO to explain how you make investment decisions!)



Novae Meridianae Demetae Dexter delenda est

Empathy for Optus

Optus yesterday was fined $178,200 over adds for a "Max Cap" plan in July and August last year. Reporting on the story in the SMH Lucy Battersby says that Optus doesn't agree with the claim that the ads were misleading but moved to replace them immediately.

In an opinion piece also in the SMH Elizabeth Knight writes;

The reality is that the ACCC spends a ridiculous amount of time dealing with exaggerated or plain fictional marketing claims made by telcos. It is hard to find someone who hasn't got some beef about their telco service provider or mobile phone bill.

Given that she then recites some of the language that David Howarth so delightfully ridiculed as I noted in a column for itNews it may surprise you that I feel some empathy for Optus.

The reason is simply that there is so much inconsistency in the operation of the law of misleading and deceptive conduct. Optus in this case was pursued by the ACCC and took the decision to change their practice to avoid a lengthy argument. The fine they have been asked to pay is less than the annual salary of their corporate counsels.

Meanwhile last December Optus initiated its own action against Vodafone over the latter's "infinite" plans. They were unsuccessful in gaining an injunction and have since dropped the matter. But it was the judgement in the injunction that was extraordinary.

Elizabeth Knight notes that "It's true that the more sophisticated consumer understands that there are plenty of calls that are not covered by a cap, but in some cases the fine print exclusions are a fraction the size of the headline marketing claims."

But Justice Nicholas stated in his judgement (at para 19);

It also needs to be remembered that ordinary and reasonable consumers, who might be expected to take some care of their own interests, are likely to do more than simply rely upon these particular television commercials in deciding whether or not to sign up to the respondent’s plan. These types of plans typically involve a contractual commitment of a year or more in duration and are invariably the subject of terms and conditions which relate to matters of detail of the kind that the applicant’s complaints focus upon.

According to this decision it doesn't really matter how much the actual terms vary from the advertised terms because the customer is LOCKED IN TO those terms the customer has an increased obligation to read and understand the full terms before acquiring the service.

Optus not only lost but has been required to pay Vodafone's costs. It would be interesting to know which amount is higher, the fine they just received or the cost of their failed litigation.

Personally I think Optus over-stated the case; they listed all the call types not included in the Voda plans. A focus only on 1800 and 13/1300 (in line with ACCAN's Fair Calls for All campaign may have been easier to argue.

So in defence of telcos and others, it is very hard to win the internal battle on compliance when the external rules are vague and inconsistently interpreted.

Novae Meridianae Demetae Dexter delenda est

Mobile coverage and information in markets

In his Twisted Wire podcast last week Phil Dobbie raises the question of how consumers should be informed about the coverage available on mobile networks. On positing the idea of a consolidated detailed map of coverage Telstra’s Max Jennings said;

I don’t think so. It’s a very competitive industry in this country, and it’s in each of the operators interest to (a) publish correct data about coverage and performance and (b) to maintain that performance level over time. Now the coverage maps won’t indicate performance per se, they’ll indicate where the signal is available; but the capacity side of the equation is also extremely important.

Your customers will very quickly tell you if you are not meeting the expectations that were delivered to the customer at the time of purchase and they have the opportunity to walk to one or two or however many operators that exist selling mobile services.

I don’t think it needs to be regulated. I think the competitive forces within the industry will sort that issue out.

The discussion reveals a good example of the naive faith in competition and markets promoted by telcos. As I've outlined elsewhere the discussion ignores what is known in economics (after Akerlof's paper as the "market for lemons". More recently research shows that the problem of the efficiency deviation of lemons markets is increased by increasing competition.

The position described by Max of a customer being able to change network after the fact of finding poor coverage reflects the failure to understand that the consumer can't do that because of a lack of information about the alternative.

The suggestion ignores the high switching costs for customers as well. There is not only the problem of time commitment now but the very fragmented spectrum model that really you want to keep your phone on the network you bought it for.

But the buzzword in customer experience these days is "reducing customer effort" with its own score. The attitude of let customers buy and then experience the coverage doesn't reduce customer effort.

It is a bit disappointing because when Max and I worked together in the Corporate Customer Division of Telstra the research then conducted on customers by PA Consulting revealed that reducing the effort they had to put into managing telecommunications was a big driver of assessment of the quality of customer service. That in turn fed part of the assessment of the attractiveness of our long term agreements (called Strategic Partnership Agreements).

Max and Phil went on to share a joke about how Vodafone was already witnessing a big churn driven by poor coverage experience. Vodafone has now developed a coverage checker that conveniently uses Google Maps. It has however already received negative comments as the coverage shown isn't what is reported.

The site carries the usual disclaimer about such predictive models. Over time the site could get better by being adjusted by the actual experience at actual places. (one of which can also one how high off the ground you are - ever noticed poorer coverage on the higher floors of a building). I sympathise with the carriers and the difficulty of actually defining a coverage expectation, given all the factors that can affect it. But I feel for their customers far more.

But let's face it, Vodafone has felt driven to this situation because of a small disaster with coverage. Telstra and Optus have no need to respond.

Real world markets don't work like they do in economics or MBA courses - firms and policy makers need to recognise that.

Novae Meridianae Demetae Dexter delenda est