Mar

17

Some NBN questions

March 17, 2009 | 4 Comments | Stephen King

An interesting article in Commsday.com asks a series of questions on the NBN. With my ACCC background I am not sure that my views will be considered independent but my attempt to answer the questions is given below

Will mandating a separated, open access network with no recourse to alternative or downstream revenue flows increase its financial risk and hence its financing cost and user prices?

I doubt it. There is a trade off here between the increased market power associated with vertical integration and regulatory oversight/intervention. Having a vertically separated access network removes much of the incentive for price discrimination. The access provider has no downstream retailer to favour. This simplifies the regulatory regime and should allow the access provider to adopt a more sophisticated non-linear pricing structure. The access provider should trade off separation with regulatory simplicity.

Now, this argument may not apply to Telstra because it would start with a large incumbent downstream customer base.But then Telstra is not in the NBN process.

It would be interesting to see if Telstra would have been better or worse off today if it had restructured, say, ten years ago. It would have then been free to fight it out at the retail level and may have avoided a lot of regulatory fights. That said, clearly Telstra itself thinks it would have been worse off if it had vertically separated, and it has consistently argued against the vertical separation of its activities.

· Will these increased costs genuinely be offset by the competition benefit of such a network model?

Now this question assumes that the answer to the first question is ‘yes’. So its premise is, in my opinion, wrong. However, almost 20 years of telecommunications regulation in Australia has shown that if there is a large vertically integrated incumbent with an upstream bottleneck and a dominant retail customer base, then it is very hard to get real competition (as opposed to so-called competition via pure resellers). So for a non-Telstra NBN I think vertical separation is the best starting point for competition – and involves little if any additional financing cost.

· Does this create a scenario of moral hazard where taxpayers as well as users will be expected to pay for its social policy aspects and potential losses into infinity?

Let’s be serious here. The NBN is all about social policy by delivering high-speed internet services outside our cities. It will only be built outside urban areas if it is subsidised. This will involve upfront government payments and possibly on-going cross-subsidies built into the prices. So of course those of us who live in the city will pay for the social policy aspects of the NBN for a long time. Without this, there would be no need for any government subsidy.

· What private investment might be crowded out or stranded by the NBN, i.e. DSLAMs?

This is the most worrying aspect of the NBN concept. For the first time Australia has real infrastructure based competition in telecommunication services outside the CBDs of our major cities. This competition relies on the Telstra ‘last mile’ of copper, in the form of Unbundled Local Loop (ULL) access services. Retail competitors invest in DSLAMS which they place in Telstra’s exchange facilities. My understanding is that much of this investment will become redundant if a fibre-to-the-node network is rolled out.

While there is still significant debate about the regulated price for ULL services, this form of competition is a quantum leap forward from simple resale services. Competitors can be true innovators and improve services for customers. The NBN risks this competition and returns us to the days of ‘resellers’. It will mean more regulation, not less.

· Should the fact that its exclusion from the NBN process has wiped billions off Telstra’s share price and, hence private and national wealth via the Future Fund, be considered as a factor when evaluating the overall economic benefit of the NBN to the nation? Ditto for delayed investments by others.

In the current share market downturn numerous companies have had billions wiped off their value. I haven’t looked to see if Telstra has fared better or worse than equivalent overseas Telcos. So again, I am not sure that the assumption behind the question is correct.

· What are the threats to Australia’s perceived sovereign risk and ability to service capital account deficits if the Commonwealth makes a conspicuous attack on Telstra’s property rights and competition treaty obligations in order to deliver the NBN—specially given that the Commonwealth sold the same company as an attractive investment a matter of years ago?

I am not sure what treaty obligations are relevant here. On sovereign risk – interesting question and I don’t know if there has been work done on this. My glib answer is ‘no’. If we look at conspicuous attacks on property rights then the divestiture powers in the U.S. (and the forced break up of AT&T) look pretty nasty and it doesn’t seem to have reduced faith in the US dollar, faith in US treasury bills or the size of the US current account deficit.

· What about the creative destruction that publicly-stimulated and funded high-speed broadband might bring in old world media sectors—for example, will it accelerate the decline of newspapers and television? What are the social and economic consequences of this decline, especially in potential monetary costs such as France’s proposed cash subsidies for newspapers, or the likely long-term Australian policy response—dramatically increased funding for the ABC? Should governments take responsibility for the losses caused by economic disruptions they help stimulate?

Hmmmm. Compensation for the free-to-air television networks. And how much did they pay for the valuable spectrum that they use?

I do not know what the future will bring for newspapers or television – but I do know that they will look very different in the future compared to today – or they will be extinct. The NBN process has little to do with this as broadband will grow in speed for most Australians with or without the NBN.

· Will high-speed broadband cause increased losses or disincentives for creators of intellectual property such as musicians, movie makers and television producers? What are the costs to society and producers of increased piracy as speeds and presumably quotas increase exponentially?

Again, the fallacy here is that NBN really changes the game. It doesn’t. For most Australians very fast internet is a reality or will be in the next few years with or without the NBN. So any extra effect of the NBN on piracy and incentives is likely to be very small.


Comments

4 Responses to “Some NBN questions”

  1. a student on March 18th, 2009 12:50 pm

    There’s a some stuff here I don’t understand. For example what is a DSLAM? Also, what exactly has the last 20 years of regulation shown? What would have we expected if there were not a vertically integrated incumbent? For someone who has not kept up with the details, a post for beginners would be useful. (I know Josh wrote the series in the Age, but he didn’t cover these points)

  2. Grahame Lynch on March 18th, 2009 1:56 pm

    Thanks for taking the time out to post on my article Stephen, I appreciate it. Just by way of clarity, the first question re financial risk is basically comparing the cost of finance for a start-up player like say an Acacia versus an established carrier like Telstra and Optus. The latter are better credit risks and thus can probably get finance on better terms. The second last question was more geared towards “cultural values”: not about bailing out TV stations but more a situation like say where Australian produced drama collapses. Will the government be prepared to step in and pay for it if commercial television withers on the vie. Again, thanks for answering my questions!

  3. kme on March 18th, 2009 4:11 pm

    student: A DSLAM is a piece of carrier equipment that is connected to a customer’s copper line to provide DSL service over that line.  It is essentially the carrier-end counterpart to your ADSL modem, and connects into the carrier’s core network.

  4. Stephen on March 18th, 2009 9:53 pm

    student: just on the difference vertical separation would make. An integrated incumbent has an incentive to discriminate against downstream rivals – both in terms of price and on non-price terms (Nick Economides from NYU has a technical article on this that you can probably track down on his home page. The ACCC often refer to an article by Mandy (sorry I can’t remember more details).
    So a lot of the regulation (particularly since 1997 when competition was generally opened in telecommunications) has been heavy handed to avoid discrimination. The integration immediately means that the regulator and the integrated telco are in conflict.
    Vertical separation doesn’t get rid of the bottleneck problem but it does get rid of the issue of discrimination. To see the difference, think of the controversy regarding electricity transmission regulation. There isn’t any! The transmission companies are vertically separated and, while they still argue with the regulator about the exact price for their services, this becomes a pretty straightforward technical task.
    So vertical separation does not remove the need for regulation of the bottleneck facility but it does make the regulation easier, and avoids some of the conflict between the regulated firm and the regulator.
    Telstra’s argument against this is that vertical separation raises the costs of providing telecommunication services so any regulatory benefits are outweighed by increased costs. I doubt it (as someone who has been involved in both teleco and electricity regulation, the latter is much more straightforward than the former) but it is really an empirical question.