North American Network Operators Group
Date Prev | Date Next | Date Index | Thread Index | Author Index | Historical

Re: Lessons from the AU model

  • From: Tom Vest
  • Date: Tue Jan 22 00:33:28 2008


On Jan 21, 2008, at 9:53 PM, Mark Newton wrote:

On 22/01/2008, at 10:21 AM, Tom Vest wrote:

On Jan 21, 2008, at 6:10 PM, Mark Newton wrote: 

It goes a bit deeper than that when the monopoly can compound the
problem my artificially constraining capacity by underspending on
infrastructure (e.g., only lighting one pair on a multi-pair cable)

So infrastructure spending can (and does) affect the price.

Hi Mark,

So you're saying that if a cable owner/monopolist simply lit another fiber pair, that would cause them to reduce prices? 

No, I'm saying that if another infrastructure provider launched
itself onto the marketplace, that'd immediately inspire the
incumbent who is presently using scarcity as a justification
for high prices to light another fiber pair.

Actually, what I think you said, this time, is that new capacity investment, when it takes the form of competition, can affect prices.
Which goes without saying. But the same thing can happen without new capex, e.g., if a new entrant can purchase (otherwise unutilized) wholesale capacity and multiplex/resell, either at a lower price point or with other value adds, e.g., customer service, etc. It's the competition, not the new investment, that drives the price train... unless of course you outlaw resale or make it technically impossible.

It's a bit more complicated than that, but arguing that supply
has no effect on price is overly simplistic when there are
monopolistic barriers preventing new sources of supply.

Put it this way: how would you define (much less calculate) "replacement cost" for an asset whose financing was predicated on a useful of capacity of (x), but which, with fractional additional investment relative to the original outlay, can be leveraged to deliver (x)^4-n capacity -- with n yet to be determined? Must every increment of the now vastly larger resource be priced as it would have been assuming the "original" max cap? How much must the "replacement cost" replace? The original (x) capacity? The as-yet indeterminate (x)^n capacity? The originally anticipated/full scarcity-based/monopoly-backed profits?

Whichever one of those comes out to the largest number.

But the problem is, you never know which one will come out to the larger number until the proverbial "long run".
In some countries, those holding the capacity are betting that (zero to very few sales) + (very high prices) + (freedom from internal and external competition) will deliver the big number. Others are betting that many small slices of a much bigger pie will deliver the big number.
Who's to say, today, which one will be right in the end?
I bet I can guess which one you'd rather live in however.

Eventually the asset will reach its capacity -- we can't keep
upgrading things forever.  Submarine cable systems also have
a useful working life, so even if they haven't reached capacity
they'll run out of legs eventually anyway (the ones installed
during the dot-com boom are approaching their half-life)

When the cable is full or EOL'ed its owner should have earned
enough to build a new one at current market rates.

I believe that someone will be able to "build" (i.e., finance) more, when/where more is required. Whether that's the most recent inheritors of the old/distressed assets or someone completely new remains to be seen.

So if they don't have a billion or so dollars stored away somewhere, they're
selling below replacement value.

With very few exceptions there's no "they"; the old "they" is gone, the new "they" didn't take over until fairly recently, didn't bankroll the original construction, and isn't bearing the financing costs of that construction.

Once you get acquainted with the power of that ^n, you'll believe ;-)
Unfortunately, your location gives you few opportunities to familiarize yourself. 

Well, no, we have footprint in Australia, the USA and Japan at
the moment.

We'd have built out to Europe by now if not for the fact that
global IP transit is being sold cheaper than transatlantic
transmission, so what's the point of building a POP across the
pond?  Now, given that transatlantic transmission is already
artificially cheap due to the acquisition of distressed assets
in 2001, what does that tell you about IP transit pricing?

It's cheap alright; how much should it be?
As for transit < L2 pricing? That tells me that someone has a traffic imbalance problem, and you are the beneficiary; revel in your good fortune :-)

Metered charging systems are, to me, evidence of a realization that
the business model underlying much of the Internet's last five years
is unsustainable.  You guys might think they're a novel and
unwelcome arrival at the moment, but give it a few years and we'll
see what happens :-)

If fine-grained metered pricing comes to the rest of the world, it'll be because people roll over for it (you guys weren't given a choice). 

No, it won't be because people roll over for it, it'll be
because carriers and service providers just get on with
it and do it.

If one does it alone, in the presence of competition, they will be punished into oblivion.
If all do it at the same time, in the presence of rule of law, that will likely prompt an immediate anti-trust intervention.

See my first post to this thread to see the progression which
outlines why the introduction of metering by _one_ serious player
in any given economy virtually forces every other player to
switch to metering as well.

Funny, that's also exactly how flat-rate pricing went from unprecedented to unavoidable in big open markets like the US, Japan, UK, etc.
So the dynamic you're describing doesn't explain much -- except maybe that for some regional markets, outcomes may be completely contingent on what "one serious player" decides to do.

Do you think Australian ISPs haven't tried to offer US-style
flat-rate services?  Of course they have.  And they get destroyed
in the marketplace.

Look, the system is extremely well, um, arranged in your home market. Maybe now you have competitive metro p2p, competitive access, multiple peering points and abundant T2 peering. Regardless, you live in an English-speaking country with a cosmopolitan user base, and an absolutely inescapable international bottleneck. It's no surprise that, to date, flat-rate has punished AU ISPs.

Sounds like change is afoot however; I wonder how closer to flat-rate AU will come after one or two new cables are completed... ?

Here's the thing that metering gives you:  it stratifies the
marketplace.  It gives you two classes of customer.

One class is customers who know they can live painlessly within
the boundaries of whatever quotas you're offering.  They don't
complain, they just pay their flat monthly bill every month
and get on with their lives.

The other class is customers who do so much P2P that the
imposition of quotas is a painful and unwelcome experience.
They whinge and bitch loudly about how awful their ISP is,
and migrate en-masse towards whichever ISPs are providing
"unlimited" services.  The only people who truly care about
"unlimited" are the ones who know they can't live within any
limits.

That means "unlimited" ISPs almost exclusively attract the
most voracious, least profitable, noisiest, most difficult
to support, loudest complaining customers.  And the metered
ISPs cater for normal folks who aren't like that.

That's the dynamic some of you are missing which makes
quotas inevitable.  If one moderately large player adopts
it, the rest of you are going to have to adopt it too.

Here's another dynamic you missed. The coexistence of flat-rate and metered access creates two tiers of regional markets: the flat rate ones that generate lots of content and service innovations, attract lots of talent and FDI, and over time come to occupy an increasingly central position in the evolving global L2/L3 topology -- and the ones that don't, whose native innovators and content providers prefer to ship out or offshore production to the former. Metered access exacts a price at the national level.

If/when that happens, I'll be lobbying my local gov to turn over the water infrastructure to me so I can replace it with
household Evian vending machines; 

Where I come from household water is already metered, so I'm
not sure what you're talking about :-)

Agreed, but I almost never hear my water vendor claiming that my rates need to be increased so they can cross-subsidize a new, separate national plumbing platform.

and I'd recommend you all get in on the ground floor in the air market ASAP.
Better be quick though, because the revolution will be just around the corner... 

A sensible provider will set quotas large enough that
98% of their customers will never hit any limits.

The only people they'll piss off will be the 2% of customers
they don't want in the first place.

Hardly fertile ground for a revolution.

That almost sounds unobjectionable, I'll grant you -- at least in currently unmetered, high demand markets; everywhere else the bandwidth demand for any/every customer segment is nothing more than an artifact of whatever metered pricing plan is currently in place. So the reasonableness of the bandwidth cap level is itself contingent on the reasonableness of the metered plan.

But even assuming you manage to define a "reasonable" cap, how will you defend it against competitors, and how will you determine when & how to adjust it (presumably upwards) as the basket of "typical" user content and services gets beefier -- or will that simply tip more and more people into some premium user category?

Some of us would rather fight than switch (to an enterprise account) ;-)

Cheers,

TV

- mark

--
Mark Newton Email: [email protected] (
Network Engineer Email: [email protected] (H)
Internode Systems Pty Ltd Desk: +61-8-82282999
"Network Man" - Anagram of "Mark Newton" Mobile: +61-416-202-223