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Re: Lessons from the AU model

  • From: Tom Vest
  • Date: Mon Jan 21 22:05:05 2008


On Jan 21, 2008, at 8:20 PM, Roderick Beck wrote:

Tom,

With all due respect, what are you trying to say in simple, clear English?

It is plain wrong to claim the DWDM can explain today's prices on the Atlantic

Is it? Sorry, how do you explain it then? An unanticipated/ undiscounted DWDM-driven windfall in salable supply (1), plus competition (2), plus financial distress (3), plus "innovative" transactions (4) are my prime suspects; the fact that every increment of private line capacity sold or otherwise transferred is fungible and can be further multiplexed just accelerates the (2-4) dynamic. I believe that the same thing -- (2) leading to price collapse, leading to (3) -- would have happened even if there been only two TA cables, assuming of course that (2) still applied -- maybe even if there were only one cable with enough upgradeable fiber pairs. Sure, "overinvestment" played some marginal role, but each new facilities platform added a multiple to the available supply,

1x, 2x... 8x...

whereas DWDM advances that really kicked in only after gen1 entepreneurial cables were already planned if not in the water, added/ continues to add exponents

(1x)^4, (2x)^6... (8x)^n?

and that DWDM allows providers to make sufficient ROI..

I didn't say that; I did say that I don't know how to define, much less calculate, "sufficient" ROI.
Sufficient for what? When is "sufficient" ever sufficient, assuming you can extract more?

If I can build one house, and rent it, manage it, and and maintain it at an overall return that will enable me to subsidize 100% of the purchase of another identical lot and identical materials and labor to build a second house, then maybe I'll decide that that's not really sufficient, e.g., because people demand bigger houses today, or maybe I think I could squeeze harder and get enough for three houses, or maybe four... Which one is "sufficient"? What if I've already got a lot of empty houses, but the market for housing won't deliver prices that satisfy my preferred sufficiency test?

I have to believe that the financial authorities (public and private) will recognize these new, previously undiscounted developments, and find a way to integrate this new, previously unrecognized abundance into the broader economy -- e.g., by bankrolling future capacity builds (when there is real demand) even though their builders can't promise and won't deliver bubble-era returns. I have to believe it because I'm not cynical or paranoid enough to buy into any worldview that would lead to other assumptions. I might be proven wrong -- but if I do I'd have to start wondering about all sorted of things, e.g., the 200mpg combustion engine, etc...

TV

About 70 percent of the operating costs of a TransAtlantic cable are undersea maintenance and undersea maintenance costs are rising (think fuel costs).

You can spread those fixed costs over more waves as DWDM improves, but it is not enough in general.


I was comparing initial build/launch capex to the incremental capex required for upgrades (granted these costs vary by platform/ technology generation).
I'm not surprised that a large/rising share of opex is O&M. The fuel component of O&M isn't incrementing in parallel with additional capacity sales, so why isn't expansion of the de facto sponsorship pool one way to offset the rising costs?

TV


Sent wirelessly via BlackBerry from T-Mobile.

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

Date: Mon, 21 Jan 2008 18:51:24
To:Mark Newton <[email protected]>
Cc:[email protected],[email protected],"Geoff Huston" <[email protected]>,"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 21, 2008, at 6:10 PM, Mark Newton wrote:

On 21/01/2008, at 10:49 PM, Tom Vest wrote:

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.


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?
This mistakes a contingent symptom or tactic or mechanism -- i.e.,
the intentionally misleading public explanation ("we're sold out") --
with the real cause/strategy/motives behind "artificially" high
prices...

We get that every day in .au (Transmission on the monopoly route
between Melbourne and Hobart costs 3 times more than transmission
between Sydney and LA;  and other potential cable operators have
always known that the monopoly has an excess of supply hidden away
somewhere which they can roll out at bargain basement prices if
a competitor ever arrives in the market)

[ housing ]
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...


I think the dominant factor that the American internet sector has
been grappling with goes back further than that.  It has its origins
in the dot-com boom, when lots of people who didn't have any real
money rolled out enormous infrastructure buildouts.  When they
inevitably went broke their infrastructure was bought at cents in
the dollar, enabling the current generation of Internet companies
to behave as if the infrastructure they're using was a lot cheaper
than it really is.

So hardly anyone has been selling below cost, but almost everyone
has been selling below replacement cost.



This makes perfect sense for resources that are not subject to
"multiplexing effects" -- esp. unanticipated (undiscounted)
multiplexing effects.
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?

So everyone can extract profits for years, making out like bandits
as they grow in to the
excess capacity that was installed between 1999 and 2001, and they
won't have a day of reckoning until they run out of capacity and
find that they haven't been earning enough from their networks to
service the debt they're going to need to take out to perform the
next round of infrastructure upgrades.

Example:  You cannot seriously expect me to believe that the price
of transatlantic connectivity actually reflects the cost of laying
cables across the Atlantic.  It defies common sense that a Gig-E
tail from NYC to London is priced within an order of magnitude
of a Gig-E tail from NYC to Boston.


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

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).
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; 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...

TV