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: Mon Jan 21 01:13:01 2008



On Jan 20, 2008, at 11:14 PM, Geoff Huston wrote:


Matthew Moyle-Croft wrote:

Southern Cross cost some US $1B to construct about a decade ago
RFS was Nov 2001. They full paid the debt from a US$1.3B cost of construction in Oct 2005.
(see http://www.southerncrosscables.com/public/News/newsdetail.cfm? StoryID=14)
So, they're making some VERY decent money out of the duopoly with AJC.

Yes, that exercise managed to weather the slump in prices a couple of years back when supply far exceeded demand, and then exploit their excellent technical position when demand picked up and translate that position into good revenue streams that appear to be well above initial construction and ongoing operational costs.

I don't believe AJC has had a similar story, but others may know more here.

Hence why Telstra's building their OWN cable to Hawaii. It's cheaper to build than buy!

My comment is that its generally more complicated than that, and from a sufficiently distanced view overspending on infrastructure forces up prices as much as underspending. The only real revenue stream to fund this infrastructure comes from this pool of 24M folk living at the bum end of the Pacific Ocean. Paying for a large number of underutilized cable projects does have a higher total recurrent cost than would be the case of there were efficient sharing of a smaller number of cable projects, and ultimately its consumers who fund this inefficiency in supply. So sometimes competition provides natural incentives for cost efficient investments, that ultimately benefit consumers, and sometimes competition gets it wrong and over-invests because the actors cannot resolve their individual requirements in ways that result in efficient sharing of common venture infrastructure investments, and in such cases the consumer ends up paying for the inefficiency in infrastructure investment. So sometimes it is cheaper to lease than construct, and sometimes its not.

For anyone who has the opportunity and inclination to truly monopolize an isolated market, the "best" price to sell critical inputs to a potential competitor is certainly (infinity) -- and if the input is fungible, then *everyone* is a potential competitor. Sure your market grows less/more slowly, and your near-term revenues are lower -- but you have an untroubled eternity of guaranteed revenue/profit to console you. Building new facilities, even terrifically expensive and completely redundant ones, will cost less than (infinity) -- so of course this makes perfect (if utterly crazy) sense.

(and yes, since oceans are not the only features that impose large multipliers on facilities construction costs, this is still a fairly common situation in the world)

However, it's not just "consumers" who are paying the price; it's also every other producer in the economy. So if the bottleneck exploiter is not generating as much or more jobs, innovations, private investments, taxes, and other returns to the general economy, compared to the amount that were foregone (never created) by every other productive endeavor in the market, then it's the economy as a whole, present and future, that's paying the price.

Here endth the Nanog lesson in economics from me ( :-) )

My only point in entering this thread was to make the observations that the lessons from the AU model may not be very generic - small isolated communities often have a unique set of constraints for investments in communications systems and that often results in different industry structures, different relationships between the actors and often results in different pricing structures in the consumer market. I'm not sure that I'd be confident in generalizing this particular history into anything more generic that would apply to other communities in other parts of the world.

(My anti-fatalist rant)

This all seems pretty straightforward -- except of course that you, we, and presumably the A-Cs and other fairly observant people can make similar observations, and perhaps even arrive at similar/shared conclusions. Given that, and the potentially extreme/enduring costs (i.e., for everyone but the bottleneck exploiter) borne by everyone who happens to get stuck in the wrong kind of market, shouldn't we look for other, more practical lesson(s) as well?

TV