opinion Shortly after former Alcatel-Lucent executive Mike Quigley stepped on board as the first employee and leader of the National Broadband Network Company in mid-2009, a new term entered the lexicon of Australia’s telecommunications sector: ‘Retail service provider’ or RSP.
It quickly became apparent why Quigley was so fond of using the word to describe Australia’s cohort of internet service providers.
A key plank of Labor’s NBN policy has always been that the company tasked with building and operating the national fibre network would not sell services directly to consumers. Instead (the Government’s legislative flirtation with the retail option notwithstanding), the role of NBN Co was cast broadly as an alternative to Telstra’s dominance of the wholesale market.
Where government regulation of the telecommunications sector went wrong over the past decade — so the thinking went — was to allow Telstra to play in both the retail and wholesale markets. Labor would not make that mistake again with NBN Co.
Thus Quigley’s use of the term retail service provider. The label has allowed NBN Co to constantly remind the sector that it will not be competing with existing players, and sharply define its customer base as those who sell services directly in the end user market.
It’s a subtle but powerful distinction that Quigley made – and the term was quickly adopted by the entire sector. I view it as just one of the gentle but powerful ways in which Quigley has shaped the entire sector’s view of the NBN since taking the reins of the project. I don’t know whether there is an ancient Chinese parable which can better express this idea, but certainly it’s a central tenet of many business philosophies that if you frame the boundaries and set the terms of a debate, you may well also influence its outcome.
But there’s one problem with this framework that Quigley has cast over Australia’s internet industry.
The incessant consolidation amongst ISP ranks over the past year has created a situation where NBN Co will increasingly only provide services to a tiny number of companies.
Going back five years, Australia’s broadband industry was filled with a myriad of players in sharp competition with each other.
Telstra and Optus dominated the sector, but smaller ISPs like AAPT, Primus, iiNet, Internode, Adam Internet, Netspace, TPG, Westnet and more ensured that customers had a plethora of broadband options. Fibre players like Pipe Networks, PowerTel and even Uecomm ensured that the majors like Telstra and Optus had competition in the backhaul markets.
But over the past few years that landscape has diminished dramatically.
With the revelation today that iiNet would snap up AAPT’s consumer arm, iiNet has succeeded in swallowing up some of the larger medium-sized players in Australia’s internet market. AAPT. Westnet. Netspace.
TPG – another fast-growing player of a similar size to iiNet – bought Soul and then Pipe Networks. For its own side, even Optus has made acquisitions, picking up Uecomm in May 2004. And of course AAPT had previously bought PowerTel, which after iiNet carves off its consumer slice will now form the majority of the AAPT business.
To be honest, I expect further consolidation in the sector.
Right now, broadband providers like iiNet and TPG are trying to bulk up with as many customers as possible as fast as possible, as they prepare to wrestle Telstra and Optus for dominance in a post-NBN world, where ISPs’ ability to build their own infrastructure suddenly means nothing and marketing and value-add services that will lead to customer retention become the name of the game.
I would be surprised, for example, if Adam Internet in Adelaide hadn’t received a few expressions of interest over the past few years, although I doubt managing director Scott Hicks would sell his family business.
I would bet that John Linton would sell Exetel for the right price, however, and it remains to be seen how strong Primus Telecom’s commitment to its Australian division will remain. EFTEL – which is struggling along on the ASX, with its share price around 1.7c – will surely be bought eventually, and others like Dodo and TSN would surely fall from their own trees for the right price.
With TPG having missed out on the AAPT feeding frenzy, there is no doubt that its acquisitive chief executive David Teoh will be looking elsewhere for a smaller but still satisfying meal.
All of this begs the question – just how many “retail service providers” will the NBN actually serve? If you look several years ahead, it is likely that you will be able to count them on one hand. There will likely be no more than five important RSP customers of the NBN (plus VHA for mobile backhaul):
- Telstra: Because it is too big to be bought
- Optus: For the same reason
- iiNet: Because it has bulked up quickly and is now in a strong ownership position
- TPG: Because it will likely snap up most of the rest of the smaller ISPs
- Internode: Because Simon Hackett will never sell his baby – and if he does list it on the ASX, he will likely maintain a large stake that would prevent a sale
It is already obvious that there will be several bad consequences for consumers from this consolidation of the sector. For starters, when there are fewer broadband providers in Australia, there will be lessened competition that will likely lead to less price differentiation between companies.
Telstra, Optus, iiNet and Internode do not represent the economical end of the broadband market. In general, they are focused on getting their customers to pay more, not less – through the provision of value-add services such as telephony, IPTV and more.
It is cheap providers like TPG, Exetel and Dodo which keep these companies on their toes, price-wise. And issues such as potential downtime mean that consumers are much less willing to churn their broadband provider because of pricing issues – unlike in the cut-throat mobile market.
It was evident when Telstra cut its broadband prices dramatically over the weekend that ISPs like iiNet and Internode were already charging more for their (admittedly stellar) services than other players. And iiNet chief Michael Malone has already flagged his lack of enthusiasm for AAPT’s ‘unlimited’ broadband plans, which have shaken up the market significantly.
Consumers love the plans – but they don’t make much money for ISPs.
Secondly, as Australia has already witnessed in the mobile market, the consolidation of the market into a small number of powerful players provides a strong barrier to entry to small, innovative players that can drive technology forward and provide options that others can’t.
When iiNet and Internode started flooding Telstra’s exchanges with DSLAMs in the early years of this decade, consumers flocked into their welcoming arms, because the rollouts were providing a technological advantage over slow-moving incumbents Optus and Telstra. In a post-NBN world, it will be very hard for new players to follow that example and shake things up.
We’ve already seen evidence of the problems associated with industry consolidation in Tasmania, where so far, just four RSPs have signed up to market NBN fibre services — and only one of them being a ‘cheap’ option, in the form of Exetel. If you were to go back half a decade, that number would have been substantially larger. And the prices on offer in Tasmania have not exactly knocked our socks off — at they’re barely competitive with ADSL.
In the worst case, companies like iiNet simply appeared to transplant their existing greenfields fibre pricing into Tasmania — with no apparent regard for how the economics of the NBN might change things. Exetel was the only company which took a radical approach to its NBN pricing at all.
Now it’s obvious that Australia’s broadband future will not be all doom and gloom. Universal fibre broadband will be a wonderful thing. AAPT has been badly managed by Telecom New Zealand for years and the removal of the question mark over the Kiwi telco’s stake in iiNet is a welcome move. Furthermore, mobile broadband services are increasingly keeping fixed broadband players honest.
But Labor’s NBN policy is not just – as many assume – a simple fibre network rollout that will offer latency and bandwidth nirvana. It is a fundamental re-shaping of Australia’s telecommunications sector. And we are now starting to get a picture of just what that future may look like.
When the NBN rollout comes past your premise, you will have a choice of which retail service provider you sign up with. But that choice may be limited — and the plans not as broad as you would like.
Image credit: net_efekt, Creative Commons
“When iiNet and Internode started flooding Telstra’s exchanges with DSLAMs in the early years of this decade, consumers flocked into their welcoming arms, because the rollouts were providing a technological advantage over slow-moving incumbents Optus and Telstra.”
Telstra had ADSL2+ equipment in many (if not most) exchanges at least a year before it’s competitors. It was pure unwillingness to provide higher speeds (which push on to lower costs per Mbit) that prevented the flicking of switches.
You might remember that Telstra’s ADSL2+ availability was synchronised to where competitors had DSLAMs for a fairly significant period of time too – until it decided to offer ADSL2+ services to wholesale customers.
The danger with the NBN is that in several years when 100Mbit is “old news” and someone wants to provide Gigabit-capacity services – whether NBN will permit that to happen.
Yup, you’re right on all this Will. Not sure if you’re saying that invalidates my argument? ;)
I agree the danger with the NBN is that with no competition, there will be no incentive for technological innovation. After all, if the NBN is only making a modest return now, why would it invest more in future above its remit, and further diminish that return?
Well, no, doesn’t invalidate your argument. I’m trying to say that they wern’t really “slow moving” but unwilling to provide a better service for which there was no competitor.
With 200 POIs required to cover the nation (and Telstra arguing for more), it will be difficult for a lot of smaller ISPs to sell services nationally. NBN doesn’t have the concept of a single POI for national coverage, but this doesn’t mean another wholesaler will build this layer on top.
Maybe we’ll see a return to the dialup days of local only providers (only serving a couple of FSAs), which isn’t necessarily a bad thing.
Having said that, the PM is having a bad run this week, so come August 22 the whole thing could be canned anyway, and NBN staff will be enjoying their 6 month payout.
If the Coalition wins and cancels the NBN, I may need to hire an additional 5 journalists to cover the fallout!
You’ll get plenty of well qualified ex NBN staff applying ;)
As journalists??
TSN sold a couple weeks back, I can understand how its gone under the radar though :-)
Really? Who did they sell to?
I know, I could Google it. But it’s Friday afternoon ;)
planet ozi
What about Optus Wholesale with their 370-odd wholesale ULL DSLAM’s deployed around the country – there are still some strong alternatives for “RSP’s” who want naked or bundled ADSL2+ services for $30 to $40 less per month (wholesale) than from the evil empire (or NBN for that matter)!
I would like to address several deficiencies in reasoning in your article.
1. Consolidation is not necessarily a bad thing.
You state:
“It is already obvious that there will be several bad consequences for consumers from this consolidation of the sector. For starters, when there are fewer broadband providers in Australia, there will be lessened competition that will likely lead to less price differentiation between companies.”
I must say I do not believe that such a conclusion logically follows. The economics of the provision of Internet access do not suggest that having many small operators would be economically more efficient or deliver lower consumer prices. Indeed, having a few consolidated players will allow economies of scale to lower overall business costs and therefore lower prices to consumer. As prices continually fall in this market in real terms, its hard to see customers being worse off.
Furthermore, “price differentiation between companies” is not a sign that consumer’s a necessarily getting a good deal. For instance, apple vendors should all have the same price if they’re selling the same apples. Price differentiation will come about in the fibre market through creating differentiate service offerings. RSPs will be competing on the quality of the support they provide to customers and the capacity of their networks to deliver constantly fast speeds, even during peak times. There is a reason I chose Internode and will stick with it, as opposed to cheaper providers like TPG. Both providers are aimed at different markets, and that is a good thing. However, we do not need multiple Internodes and TPGs, especially in an NBN world where it will be cheaper to have one competitor in each market, specialising in its given niche.
Even if you reject the above premise, your point about the cost of churning seems somewhat out of place in this article. The cost and time to churn is an issue in the Telstra infrastrucutre only world. In the NBN world, it should be fast and efficient to churn, much like churning mobile carriers. NBN Co will be happy to switch customers on and off from certian services and service providers. While a fee could be involved, the downtime will be negligible (theoretically).
Secondly, there is an assumption that the consolidation will be entrenched and not addressed by the NBN. The NBN will lower barriers to entry by being an open access network. If any company is making truly supernormal profits, new entrants will be enticed to enter. I believe the bigger problem for getting prices down in an NBN world is the lack of competiveness in the backhaul market from Australia to the rest of the world.
2. Value add services increase consumer welfare
If it’s a bad thing for a company to want to make money by providing additional services such as IPTV and telephony, I don’t understand why. Surely if you add value, you deserve to charge more? And since there’s no tying/bundling going on, it’s hard to see any detriment.
3. Telstra price cuts indicate a problem with vertically integrated operators
The Telstra price cuts relate to the price cuts that Telstra Wholesale is offering to the retail operations of Telstra which provide the retail broadband plans. This affects the ability of other ISPs to provide competitive plans over the Telstra wholesale DSLAMs. I’d be annoyed if I were them too. How can they compete if they have much higher wholesale costs than the Telstra retailer?
4. Mobile analogy is not apt
The mobile analogy is not apt, since mobile operators are required to either:
(a) build and operate their own network;
(b) enter a joint venture regarding the building and operating of networks, either in relation to the whole or part of their network;
(c) buy access to another operator’s network, who is a vertically integrator supplier of retail services.
Unlike the market for retail service providers over the NBN, for mobile operators in categories (a) and (b) their is a great deal of variation in coverage, quality, techonology, overheads etc associated with operating the network. In an NBN world, these will be NBN Co’s problem, not the RSPs.
Furthermore, the fact that their are 3 major operators all incurring fixed costs of building relatively large networks for a relatively small population is an achievement. Their is a fair degree of price and service offering differentiation in the mobile market. Given the economics of the Australian mobile market, it is overall, in my opinion, fairly competitive.
As an additional point, the mobile market then is largely similar to the fixed line market for operator’s who onsell a service. They can only offer a cheaper service by having lower operating expenses, but they are unlikely to make much room given the high component of costs that wholesale access represent.
Finally, the above reasons are why there are barriers to entry in the mobile market. Such barriers are non-existent or considerably lowered in an NBN Co world where there is one owner of the network who provides access on an open wholesale only basis and who is not veritcally integrated.
4. Pricing for NBN Stage 1
The article you link to does not update to reflect the current pricings. Out of date information. Bad look.
Looking at the plans now, I would say this:
*The entry level plans all provide 25mbps. This is GUARANTEED, as its fibre optic. I live very close to Sydney CBD, but my ADSL 2+ maxes out at about 5.5mbps because its copper. It’s not going to get any better. I would be happy to pay the same price to get a close-to-five-fold increase in my access speed.
*Price differentiation based on speed is useful, and only likely to fall over time.
I think this addresses most of my issues with your article.
Wow. Is there anything you *do* agree with, Tim? ;)
Will post a more detailed reply later.
Actually I figure I’ve got some time, so why not respond now ;)
1. You are correct in saying that the economics of less providers in the market does not necessarily lead less competition and price differentiation.
There are economies of scale that ISPs pick up through being able to service more customers. In the ISP market this will usually come about through the avenues of being able to aggregate traffic to and from upstream providers and get a better deal.
However, the reality of the situation is that ISPs seldom pass these savings onto the consumer in terms of price decreases on monthly plans.
A good recent example is iiNet. IiNet has not significantly changed its prices in the past year. What it has done in place of charging less is to offer its customers other bonuses in terms of quota increases. I think if you got the chance to do the maths inside iiNet it would be possible to see that the company was actually growing its margins while still passing on some extra quota – all while keeping top-line revenue stable.
At the moment, there are no real quality low-cost operators in the market, and so iiNet customers are generally happy to pay top dollar and settle for quota increases as their reward.
If TPG or Exetel could increase their customer service and still keep prices low, however – which is exactly what both are trying to do with offshore call centres – Exetel in Sri Lanka and TPG in Malaysia – they will be able to put price pressure on iiNet. And that is only good for consumers.
“However, we do not need multiple Internodes and TPGs, especially in an NBN world where it will be cheaper to have one competitor in each market, specialising in its given niche. “
Frankly, I don’t agree. The more competition, the better for consumers. That is a foundation of capitalism. Why does it not benefit consumers to have ISPs fighting amongst themselves to provide the lowest prices? It’s great.
“ In the NBN world, it should be fast and efficient to churn, much like churning mobile carriers. NBN Co will be happy to switch customers on and off from certian services and service providers. While a fee could be involved, the downtime will be negligible (theoretically).”
Two points here. Firstly, we haven’t seen churn yet in the NBN world, so these are large assumptions. Secondly, most Australians won’t get NBN fibre for another five to eight years. In the meantime, we are stuck with copper and a less competitive market – less competitors means less competitive ;)
“Secondly, there is an assumption that the consolidation will be entrenched and not addressed by the NBN. The NBN will lower barriers to entry by being an open access network.”
I tend to agree somewhat with this, but in practice I’m not sure. Why? Look at Telstra. Telstra is not banking on the NBN lowering barriers to entry – if it was, it would not have inked a deal with NBN Co that essentially will see much of its long-term network construction expertise and infrastructure (its barrier to others entering its market) go away.
I think Telstra is banking that being a NBN provider will be hard.
2. “If it’s a bad thing for a company to want to make money by providing additional services such as IPTV and telephony, I don’t understand why. Surely if you add value, you deserve to charge more? And since there’s no tying/bundling going on, it’s hard to see any detriment.”
You are right. But if you don’t have enough low-cost entrants helping to bring prices down, then ISPs will never bring prices down of their own accord. The price of value-added services also needs to come down through competition (as we’re seeing now through iiNet IPTV/Foxtel dance).
3. I agree. But the solution, to my mind, is NOT to create a single wholesale monopoly – because we need competition in the wholesale market as well (and in every market). The solution is to create multiple wholesale options, preferably in direct competition so that each continues to innovate and drive prices down. A good example of a way to do this would be to KEEP Telstra’s copper around and use it as a wedge to keep NBN prices down.
Competition, competition, competition.
4. I agree the mobile analogy is not perfect. However, I do think there is a strong analogy to be made between the way the mobile operators had to consolidate to get enough scale to build enough cell towers and the way that the ISP market had to consolidate to a certain extent to build out DSLAMs.
If the fixed line market was consolidating so that ISPs could get enough scale to build out their own networks, that would be great and we might start to have a situation similar to the mobile market – as we were heading to with the DSLAM rollouts. But we are not going to have that. Instead of infrastructure-based competition (a phrase that the ACCC was mouthing continuously for five years until the NBN policy came along), we are heading towards service-based competition.
I’m not personally a big believer in service-based competition. I prefer infrastructure-based competition as it allows for a much higher point of differentiation.
5. Lastly, I am aware that I didn’t link to a very up to date article on NBN pricing :) And you’re right, we will get better basic services for ADSL-like costs.
However, I think my point is still valid. What the current NBN pricing shows us is that almost no providers have proven willing to innovate on pricing in an NBN world so far – apart from Exetel. This proves my point precisely in a micro example.
You need a plethora of small, nimble innovative competitors to sting the giants (and I now include iiNet in this category) into changing their structures and strategies as consumer demand changes.
This is hardly radical economic theory. It’s the stalwart basis of capitalism – and I don’t think I’m proposing anything unusual when I say that less companies competing in a marketplace means less competition, less innovation and a decreased likelihood of better services.
I might be exaggerating here ;) But take a look at the current pricing of “innovative” companies like iiNet and Internode right now, and tell me I’m wrong ;)
It’s a sad, sad day when it takes a pricing move by Telstra to sting the rest of the market into action.
Round 2 ;-) I’m enjoying the exchange of ideas…
With all due respect, I think your understanding of economics is a little simplistic.
“However, the reality of the situation is that ISPs seldom pass these savings onto the consumer in terms of price decreases on monthly plans.
A good recent example is iiNet. IiNet has not significantly changed its prices in the past year. What it has done in place of charging less is to offer its customers other bonuses in terms of quota increases. I think if you got the chance to do the maths inside iiNet it would be possible to see that the company was actually growing its margins while still passing on some extra quota – all while keeping top-line revenue stable.”
What you firstly need to appreciate is that the cost of service provision comprises the fixed and variable cost. The fixed cost component is largely dictated by Telstra, even on naked DSL, due to the cost of paying for access to exchanges, space rental, ULLS access etc. So once you establish your lowest priced product offering (necessarily by reference to fixed costs), you wont see the price fall much below that – you’ve always got to cover fixed costs. The same will apply in an NBN world – NBN co and the RSP need to recover fixed costs. So I’m not surprised to see that there are no falls in price at the bottom end in the copper world, and I wouldn’t expect to see it in a fibre world. It’s kind of like electricity and gas – you always pay a minimum amount to have the service connected.
However, I would argue that getting more quota for the same price is a price fall. If you’re not on the lowest or close-to-lowest plan, generally you can save some $ by “downgrading” your plan. The increased quota on all plans means you can probably transition to the lower plan and still have the same quota prior to the increase. Alternatively, you take the increased quota, in which case the average $/MB falls. Whichever way you cut it, increased quota for the same price is equal to an effective price cut.
“At the moment, there are no real quality low-cost operators in the market, and so iiNet customers are generally happy to pay top dollar and settle for quota increases as their reward.
If TPG or Exetel could increase their customer service and still keep prices low, however – which is exactly what both are trying to do with offshore call centres – Exetel in Sri Lanka and TPG in Malaysia – they will be able to put price pressure on iiNet. And that is only good for consumers.”
Firstly, your statement reflects the trade-off between price, quantity and quality. You can have a low price and high quantity, but quality will be (relatively) low. You can have low price and high quality, but quantity will be (relatively) low. You can have high quality and high quantity, but price will be (relatively) high. You can’t get something for nothing. Simple principle of opportunity costs. So I’m not surprised there is no high quality, high quantity low cost provider. TPG and Exetel are the high quantity, low price, (relatively) low quality RSP variety. — I want to point out I don’t think TPG and Extel are bad providers, just not the highest quality, but they do provide an exceptionally good value service and serve a particular market demand. —
I’m not sure offshoring call centres is going to lead to higher quality. In my work I provide advice to some very large companies, both Australian and multinational. Offshoring of call centres does not generally lead to a better customer experience, in my opinion. Fingers crossed I’m wrong, and if TPG and Exetel can manage to get all three of the attributes I said it couldn’t above, I’ll be glad to be wrong. My observations do not make me optimistic.
As for the competition between ISPs, the point I’m trying to make is that due to the economies of scale present in the ISP market, it seems inefficient to have many ISPs competing. I think the market will deliver best outcomes by seeing specialised niche players develop and dominate. Maybe you can have more than one ISP per niche, but in an Australian-sized market, I don’t think you need as many players as you seem to think. It’s things like economies of scale and limited product differentiation combinations which suggest to me that having the threat of competition and entry is enough to deliver the best outcomes, and that you need only 2 or 3 RSPs in each type of niche market at most. I would maintain that you could achieve it with only one, but economies of scale may be such that one operator is unable to provide it cheaper than having 2 or 3. This is largely theoretical now though. My main point being that my view of the market is that scale will limit how many profitable RSPs can operate.
“Two points here. Firstly, we haven’t seen churn yet in the NBN world, so these are large assumptions. Secondly, most Australians won’t get NBN fibre for another five to eight years. In the meantime, we are stuck with copper and a less competitive market – less competitors means less competitive ;)”
While they are assumptions, I don’t see why they are so large. They are consistent with the stated policy objectives the Government has for NBN Co, and potentially legislate/regulate for. I agree that the current copper market has higher barriers to entry, and therefore is a curent potential source of reduced competition. However, this is the whole point of NBN Co removing the barriers to entry, which is below…
“Telstra is not banking on the NBN lowering barriers to entry – if it was, it would not have inked a deal with NBN Co that essentially will see much of its long-term network construction expertise and infrastructure (its barrier to others entering its market) go away.”
Have you heard to the Telecommunications Legislation Amendment (Competition and Consumer Guards) Bill? It provided a very big incentive to Telstra to effectively structurally separate. Under the Bill, Telstra would be prevented from bidding for spectrum for 4G mobile telecomms if it didn’t play nice. This is all part of the Government’s stated policy objectives of introdcuing an open-access, wholesale-only operator. They want lower barriers to entry, and realised they needed some big threats to get Telstra to co-operate to pull it off.
The Government’s view is that NBN Co will encourage RSP competition and entry. It is easy to see why NBN Co should lower barriers to entry. The more RSPs connecting more homes the more revenue for NBN Co. Because RSPs are customers of NBN Co and not competitors, NBN Co will do its best to maximise uptake in order to maximise profit. Depending on the number, location and service area of the points of interconnect, it is very likely that the infrastructure investment for NBN RSPs will be much lower than it is for current copper-network RSPs. Also, new entrants will be welcomed by NBN Co, unlike the reception they receive from Telstra.
Furthermore, Telstra is arguably in a better position once it rids itself of the copper network. It really is an albatross around the neck in my view. Although this is a whole discussion in itself, being rid of the regulatory framework, constant disputes etc will allow Telstra to focus on what it is good at – providing premium quality products to consumers.
I accept it is fair to doubt that NBN Co will reduce barriers due to Telstra’s cooperation. However, I believe the above reasons should allay any such concern you have.
I would now like to skip add-on services, because I essentially agree. More competition the better. The biggest limit to date for a competitor to Foxtel, in my view, has been having an network over which the services can be delivered, which is not also owned by a service provider (ie Foxtel). In this market, the more competition the better.
“I agree. But the solution, to my mind, is NOT to create a single wholesale monopoly – because we need competition in the wholesale market as well (and in every market). The solution is to create multiple wholesale options, preferably in direct competition so that each continues to innovate and drive prices down. A good example of a way to do this would be to KEEP Telstra’s copper around and use it as a wedge to keep NBN prices down.”
This proposition is idealistic, but unsupportable. You can’t have two wholesale networks with the massive footprint they both have, servicing so few people and providing effective competition. It’s the same for electricity distribution networks, gas distribution networks, sewerage systems etc. Telco is a utility. It is definitely a natural monopoly according to the economies of scale in the market. The only PRACTICAL way to minimise NBN Co’s market power is to separate it further, such as the Singapore NGN model. However, NBN Co will be regulated like all our other utilities through Government and the ACCC. Capitalism and markets aren’t perfect. You can’t force a market to be a market that exhibits perfect competition. But what you can do is identify market inefficiencies/failures and intervene and attempt to redress the failure as best as possible. Your proposal for two networks is economically and practically unworkable, at least in a market with the characteristics of Australia (big area, low population density).
Even in more densely populated markets, I would suggest that having one regulated utility provider will result in the lowest regulated price because every user is contributing to the fixed capex cost, and the marginal cost of each user to connect is constant or decreasing and already at or close to zero.
All this fits nicely with the next point about infrastructure based competition and service based competition, DSLAMS etc.
The ACCC was encouraging infrastructure competition because otherwise the only competition in the broadband market would be for the resale of Telstra white-label products. So infrastructure competition was encouraged, and viable in the city regions. The ACCC would have been happy to see, and to some degree there was, optic infrastructure built. However it was relatively limited to CBDs. The ACCC liked seeing DSLAMs rolled-out, because it again created more competition in the copper network, which was owned by a vertically integrated player. However, a lot of these gripes disappear when you have a whole-sale only network owner.
Furthermore, the beauty of NBN is you only have to build to the POI (and there could be fewer POIs than exchanges, given the way optic works vs copper), which NBN Co will co-operate with (unlike Telstra and getting exchange access and installing facilities) and your done. You can service every premise in the FSAs covered by the POI. Unlike a DSLAM, which can run out of space and you need to install more, which you can only do if there’s space in the exchange. This also affects the cost and economies of scale of providing service in a copper network. Again, disappears in an NBN Co world.
So the DSLAM/mobile analogy is apt, due to the need to keep installing DSLAMs/base stations in order to increase network capacity. With NBN Co, the analogy breaks down.
Further more, if building a network to reach all POIs becomes an issue for each RSP, market principles would suggest that a company that has a national POI network will provide higher-level network POIs. Or alternatively, regional operators may emerge.
I just don’t see how, when we’re talking about fixed network access, infrastructure competition is better than service competition. Please elaborate on how it could do so, especially with reference to the massive fixed costs involved in building, maintaining and upgrading those networks.
“However, I think my point is still valid. What the current NBN pricing shows us is that almost no providers have proven willing to innovate on pricing in an NBN world so far – apart from Exetel. This proves my point precisely in a micro example.
You need a plethora of small, nimble innovative competitors to sting the giants (and I now include iiNet in this category) into changing their structures and strategies as consumer demand changes.
Well, I look at the price Internode has for stage 1, and while the pricing structure is largely similar to ADSL, it’s definitely cheaper. I would also say that its premature to be forecasting no change under the NBN because its such early days. While I agree that it would be good to see some innovative pricing structures etc, I think the scale of the roll-out needs to be larger first, and the potential for innovation will be greater on the mainland, as currently all Tasmania traffic has to go through the BassLink cable to get to the rest of the world.
However, I’m not sure a plethora of small nimble service providers will deliver the innovation you so desire. Please elaborate on what kind of pricing structures you would like to see and how you believe small-scale operators would be able to deliver them, especially with reference to cost structures. I am interested to hear more.
My view would be that a certain size/scale would be required to be able to provide an innovative cost structure, and therefore the number of players will be limited by that requirement.
“This is hardly radical economic theory. It’s the stalwart basis of capitalism – and I don’t think I’m proposing anything unusual when I say that less companies competing in a marketplace means less competition, less innovation and a decreased likelihood of better services.”
Like all things economic, they exhibit diminishing marginal returns. I agree with your statement of the theory, and the theory itself. More operators creates more competition, more innovation and better services. However, the question arises: how much more competition and how much more innovation and how much better will the services be with each additional provider? The Bertrand model of oligopoly states two competitors is all you need to get pricing to a marginal cost level. Also, what is the cost of providing and developing innovation and services? You might find that by only having 2 competitors such innovation and service is maximised (although I’m not suggesting only 2 operators in the RSP market will achieve this). Looking at competition in the IT industry, it is quite common to see a lot of competition and innovation with a few players. Prior to merger between Sun and Oracle they were vigorous competitors. They new merged entity still competes vigorously with IBM.
My point is I don’t believe you have made out your case that having a number of small-shop operators is the most efficient and consumer welfare enhancing market structure for the RSP market in an NBN world. You need to develop and flesh out how and why they are the best structure. As stated, my argument rests on economies of scale being required, and my belief that when the NBN roll-out is complete the barriers to entry will be lower, which will redress the lack of competition in the RSP market in a copper world.
“It’s a sad, sad day when it takes a pricing move by Telstra to sting the rest of the market into action.”
Yes and no. Telstra’s price drops are massive. This tells you how much of a premium they were charging, and that they didn’t feel the need to compete vigorously due to the monopoly position, especially in areas without competing DSLAMs. As Telstra recognises it will be a RSP only competitor in the NBN world, its engaging with and challenging other RSPs so it can get a strong foothold in the market as the NBN rolls out. This is the kind of competition we should have seen long ago. Let’s see competition start functioning in this market. And I think it demonstrates why you don’t need a lot of players, just ones that play fair.
25Mbps, sync or a/sync traffic?
I find it amazing you only get 5Mb/s in Sydney CBD.
I live in country WA, in a town of under 1000 people. I have just got my 2nd ADSL2 link today (at work) and on my current connection I can get sustained 22Mbps. Hopefully tomorrow with load-balancing I will be able to get close to double that! :)
Old building over copper. I connect through a CBD exchange, but I’m not close to it. I live in an innercity suburb, but I’m constrained by relative proximity and my building. I don’t see how it will get better without fibre. ADSL speed is purely about distance from exchange and wiring between you and the exchange. Just because you’re regional does not make a scrap of difference. If you’re close to the exchange. you’ll beat city people who are far from an exchange.
EFTEL hasn’t been bought because they have nothing value- and not very many customer either! In an NBN world I think we’ll see VHA selling NBN connections as well.
Quite possibly you are right — I can see VHA getting into the NBN and selling bundles with their mobile broadband and phones.
I’ve been with Exetel nearly a year now and have family members who’ve been using them for years and their phone support is infinitely faster and better than Telstra or Optus.
I was with iiNet for years and their phone support was excellent once you get through, they could be very slow to pick up (no, not compared to Telstra or Optus where you could wait upto 2 hours!!!).
In the end (around 6 years ago) I decided iiNet was too expensive and I gave TPG a go. That only lasted exactly the 6 months of the contract. I had nothing but issues, and their (at the time recently moved to the Phillipines) call centre couldn’t fix (and didn’t even have visibility to most of the TPG systems). They also had more dropouts / disconnects than I’d ever seen on any other provider.
Exetel are undeniably an very economic choice but they also provide excellent support. I wish I could get one of their FTTH plans they’ve started offering.
typo acquisiions = acquisitions
Cheers, fixed.
In regards to …. “typo acquisiions = acquisitions”
That _might_ be the iiNet version, ;)
The term RSP or Retail Service Provider was not something created by NBN or Mike Quigley. It was first used by Opticomm back in 2007.
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