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Re: Lessons from the AU model

  • From: Tom Vest
  • Date: Mon Jan 21 07:24:47 2008


On Jan 21, 2008, at 6:50 AM, Roderick Beck wrote:

I didn't find that very convincing. Overspending on infrastructure does not force prices up or raise long term costs.

Excess capacity leads to prices falling in telecom and every other market.

Basic economics.

Maybe we should go a little more basic still...
In the absence of competition (and esp. in the presence of risk of empowering competitive entrants), supply has no general/necessary effect on prices at all.
So excess capacity of a product that is completely monopolized (or priced by cartel fiat, ala OPEC or SC) is largely irrelevant.

On the other hand, in the specific case of Internet access (retail or wholesale level), prices have a huge impact on demand -- that's called "price elasticity".
Given the absence of any mechanism to reveal "natural" prices or "actual" demand, how does one know whether/how much "excess capacity" there is anyway?

I'm sure the Americans are experiencing excess capacity right now in housing ... :)

American construction / real estate investors and speculators are certainly experiencing excess capacity in the most extreme way, but that's because the fully loaded price of housing has gone up a great deal (and/or, the actual price point is finally being discovered/ revealed) -- at least for the credit-challenged market segment that was the primary engine of demand behind the recent boom. For them especially, lending terms have deteriorated tremendously. Now general interest rates are falling again, but credit requirements are tightening so much that, for many in that group, credit will not be available "at any price".

If that seems counterintuitive, think Japan between c. 1993-2005: huge "excess capacity" in real estate, inflation-adjusted interest rates at zero or below, and yet (or perhaps "as a consequence") no one buys, because the banks refuse to lend...

Come to think of it, our sector has been struggling with its own roughly similar terms-of-exchange crisis since about 2004-2005... arguably driven by very similar prior circumstances as well... worth investigating a bit further perhaps...

TV

Sent wirelessly via BlackBerry from T-Mobile.

-----Original Message-----
From: Tom Vest <[email protected]>

Date: Mon, 21 Jan 2008 01:10:16
To:Geoff Huston <[email protected]>
Cc:Matthew Moyle-Croft <[email protected]>, Randy Bush <[email protected]>, Andy Davidson <[email protected]>, Andrew Odlyzko <[email protected]>, [email protected]
Subject: Re: Lessons from the AU model





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